| Michael Baye, Indiana University John Morgan, Princeton University |
| Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets |
| Session: C-2-14 Saturday 12 August 2000 by Baye, Michael |
| This paper examines the equilibrium interaction between a market for information and the product market it serves. The market for information is controlled by a profit-maximizing gatekeeper, and the related product market is comprised of n homogeneous product firms. The gatekeeper charges fees to firms in the product market who wish to advertise their prices and to consumers who wish to obtain access to the menu of advertised prices. We show that the gatekeeper's profits are maximized in an equilibrium where (a) fees charged for consumer access are set low enough to induce all consumers to subscribe; (b) advertising fees are set above socially optimal levels, thus inducing only partial participation by firms and price dispersion in the product market; and (c) advertised prices are lower than unadvertised prices. We also find that the creation of a market for information has an ambiguous effect on social welfare and that competition among multiple gatekeepers may not alleviate these inefficiencies. |