Pre-sale information

In markets as diverse as that for specialized industrial equipment or that for retail financial services, sellers or intermediaries may earn profits both from the sale of products and from the provision of pre-sale consultation services. We study how a seller optimally chooses the costly quality of...

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Bibliographic Details
Published in:Journal of economic theory 2011-11, Vol.146 (6), p.2333-2355
Main Authors: Hoffmann, Florian, Inderst, Roman
Format: Article
Language:English
Subjects:
Consultation
Cost engineering
Economic theory
Economics
Equipment costs
Finance
Financial intermediaries
Financial services
Information
Markets
Optimization
Price discrimination
Prices
Products
Profit
Retail trade
Sales
Single crossing
Studies
Valuation
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Summary:In markets as diverse as that for specialized industrial equipment or that for retail financial services, sellers or intermediaries may earn profits both from the sale of products and from the provision of pre-sale consultation services. We study how a seller optimally chooses the costly quality of pre-sale information, next to the price of information and the product price, and obtain clear-cut predictions on when information is over- and when it is underprovided, even though we find that information quality does not satisfy a standard single-crossing property. Buyers who are a priori more optimistic about their valuation end up paying a higher margin for information but a lower margin for the product when they subsequently exercise their option to purchase at a pre-specified price.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2011.10.009