Competition and Welfare Consequences of Information Aggregators

Amedeo Piolatto (Barcelona Economics Institute)

Abstract: An exogenous shock in the informational level of a subset of consumers may affect the market structure, equilibrium and welfare. Information aggregators (e.g., Yelp) provide detailed information about experience goods, such as restaurants and hotels. Their appearance implied the creation of two groups of consumers: the informed and the uninformed. This study fosters our understanding of how information aggregators impacted competition, profits and welfare. Using a spokes model of horizontal competition, I show that aggregators may enhance total welfare mainly by making valuable information available to consumers. The effect on welfare goes through different channels: 1) realised transactions are more valuable for the match between producers and consumers is more accurate; 2) the customer base broadens, since more agents find a suitable product; 3) the equilibrium price weakly decreases, as competition amongst firms is more intense. Nonetheless, firms face a prisoner dilemma: some firms’ best strategy is release the information through the aggregator, so as to enlarge market shares; however, all firms’ medium-run profit decreases.