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Pricing Advice: The market for diagnostic information
journal contribution
posted on 2003-01-01, 00:00 authored by Ashish Arora, Andrea FosfuriDiagnostic information helps agents to make more accurate decisions. One such decision
is about investing in projects with uncertain outcomes. The value of diagnostic
information is the difference in expected payoffs with and without it, and we show that
such a value is non-monotonic in the ex-ante expected value of the project to be
undertaken. We analyze optimal pricing schemes for selling information to buyers with
unknown ex ante value. With a monopolist information seller, a striking result is that the
optimal menu of contracts is remarkably simple. A pure royalty is offered to buyers
whose projects have low ex-ante expected value and a pure fixed fee is offered to buyers
whose projects have high ex-ante expected value. This result is robust to the presence of
different types of information and to the introduction of competition in the market for
diagnostic information.