Too Much Information? Information Provision and Search Costs

Abstract

A seller often needs to determine the amount of product information to provide to consumers. We model costly consumer information search in the presence of limited information. We derive the consumer’s optimal stopping rule for the search process. We find that, in general, there is an intermediate amount of information that maximizes the likelihood of purchase. If too much information is provided, some of it is not as useful for the purchase decision, the average informativeness per search occasion is too low, and consumers end up choosing not to purchase the product. If too little information is provided, consumers may end up not having sufficient information to decide to purchase the product. The optimal amount of information increases with the consumer’s ex ante valuation of the product, because with greater ex ante valuation by the consumer, the firm wants to offer sufficient information for the consumer to be less likely to run out of information to check. One can also show that there is an intermediate amount of information that maximizes the consumer’s expected utility from the search problem (social welfare under some assumptions). Furthermore, this amount may be smaller than that which maximizes the probability of purchase; that is, the market outcome may lead to information overload with respect to the social welfare optimum. This paper can be seen as providing conditions under which too much information may hurt consumer decision making. Numerical analysis shows also that if consumers can choose to some extent which attributes to search through (but not perfectly), or if the firm can structure the information searched by consumers, the amount of information that maximizes the probability of purchase increases, but is close to the amount of information that maximizes the probability of purchase when the consumer cannot costlessly choose which attributes to search through.