The Value of Information about Product Quality

Abstract

Both consumers and a monopolist producer are uncertain about a good's quality. I derive conditions under which the value of public information about quality will be positive or negative to consumers and the firm. I find that the firm always prefers more information, but consumers may not. I identify two properties of cost functions which lead to a negative value of information for consumers: increasing returns to scale and sufficiently convex marginal costs. If, however, demand and cost functions are linear, then consumers always prefer more information. I also analyze the aggregate value of information and extensions to nonmonopolistic markets.