Markus Christen and Miklos Sarvary
Executive Summary
Theoretical work on the pricing of information reveals that competition between information sellers can result in prices that are negatively related to the quality or reliability of the information. The theory argues that when information products are unreliable (i.e., of low quality), independent products become complements because by combining multiple products, consumers can arrive at a single better product. In contrast, combining high-quality information products does not provide substantial benefits, so these products remain substitutes. In turn, competition may lead to higher prices for low-quality (complementary) information products than for high-quality (substitute) information products.
The goal of this study is to test empirically the theory’s counterintuitive predictions with the help of an experimental market based on a business simulation. Information products are independent market forecasts, which are available from different competing information sellers. Information buyers are teams that represent competing firms in the business simulation that make marketing and production decisions based on the purchased forecasts. Sellers set the price of information products to maximize their profit, and buyers decide from which seller or sellers to buy to maximize their own profit through their marketing decisions. Buyers and sellers are assigned to one of two quality conditions: high-quality, or reliable, information and low-quality, or unreliable, information. An important feature of the experiment is that though the reliability of information products (forecasts) is exogenously set, it must be inferred by both buyers and sellers from historical forecasts about another market. The simulation is played for seven periods to allow the market to converge to stable information prices. Across periods, sellers are randomly assigned to buyers within the same quality condition to limit the possibility of long-term strategic interactions.
The results from the longitudinal market experiment strongly support the theory. After some experimentation, prices converge to levels that are strikingly different between the two quality conditions. Prices are significantly higher when the information sold is unreliable (i.e., of low quality). Moreover, and still consistent with the theory, with few competing sellers of low-quality information, prices are higher than with a single seller (a monopolist) or with a large number of competing sellers.
Beyond providing support for the theory on information markets, the experiment shows that (1) information buyers and sellers are capable of learning the quality of information from the actual information products, and (2) they are capable of understanding the strategic implications that result from the subtle interaction between the characteristics of information and its price.
Biography
Markus Christen is Associate Professor of Marketing at INSEAD. His research interest focuses on the development of profitable marketing and pricing strategies. One area of inquiry examines managers’ acquisition of information for strategic decisions and the extent to which managers’ ability to forecast sales accurately is related to the ultimate performance of new products and product lines. A second research stream pertains to substantive and methodological questions about the cost and profit implications of market entry strategies (innovation versus imitation). His work has appeared in Management Science, Marketing Science, Journal of Marketing Research, Quantitative Marketing and Economics, Harvard Business Review, and Financial Times, among others. He is a member of the American Marketing Association and the Institute of Management Science.
Miklos Sarvary is Associate Professor of Marketing at INSEAD. Before joining INSEAD, he was a faculty member at Stanford University and at the Harvard Business School. Miklos’s current research is about information and media markets, with a special emphasis on competition. He has also written on the pricing implications of the Internet in business-to-consumer and business-to-consumer markets. His previous work focused on the worldwide pricing of cellular telephone services and the global diffusion of telecommunications products. His research has been published in Marketing Science, Management Science, Journal of Marketing Research, Quantitative Marketing and Economics, California Management Review, Marketing Letters, and Technological Forecasting and Social Change. He is an associate editor of Quantitative Marketing and Economics and is a member of the editorial boards of Marketing Science, International Journal of Research in Marketing, Review of Marketing Science, and Journal of Interactive Marketing.
Journal of Marketing Research, Vol. XLIV, No. 1, February 2007
View Table of Contents.