Technology and the introduction of the internet has revolutionized our world in many ways, including how we share information. With the conception of the internet, came a dramatic change in information markets and with it, “information gatekeepers”.
An information market is one where information, namely on prices, is exchanged between firms and consumers through a third-party, i.e. the “information gatekeepers”. Examples of these gatekeepers include Skyscanner for flights or eBay for the online auction market. Of course, information markets existed before the internet. For example, one could compare retail prices for groceries, clothing, hardware or cars in the local newspaper. However, technology and the internet has made information sharing more accessible, quicker and has “dramatically changed the marginal costs of acquiring and transmitting information”.
Interested in these online information markets, Baye and Morgan analyze how an information gatekeeper’s, i.e. the “middle man” for information between firms and consumers, fee-setting decisions in the information market affect the original product market and it’s competitiveness. Simply stated, these researches analyze how 1) changes in advertising fees affects firm participation and therefore, price dispersion and 2) changes in subscription prices charged to consumers affects consumer participation.
The effects of a profit-maximizing information gatekeeper on a homogeneous product market, where both firms and players are optimizing, are then analyzed in an equilibrium interaction. The main findings from Baye and Morgan’s analysis are as follows:
- Profit-maximizing gatekeepers charge consumers low subscription fees to induce participation of all consumers
- Firms are charged a price set above socially optimal levels in order to advertise their prices on the platform because this induces partial participation by firms and therefore, ensures price dispersion and more rent extraction from firms by the gatekeepers
- The prices advertised by firms on the platform are lower than the prices not advertised.
Baye, Michael, R., and John Morgan. 2001. “Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets.” American Economic Review, 91 (3): 454-474.DOI: 10.1257/aer.91.3.454