CDFP 2321

Market-Minded Informational Intermediary and Unintended Welfare Loss

Author(s): 

Publication Date: January 2022

Pages: 48

Abstract: 

This paper examines the welfare effects of informational intermediation. A (short-lived) seller sets the price of a product that is sold through a (long-lived) informational intermediary. The intermediary can disclose information about the product to consumers, earns a fixed percentage of the sales revenue in each period, and has concerns about its prominence—the market size it faces in the future, which in turn is increasing in past consumer surplus. We characterize the Markov perfect equilibria and the set of subgame perfect equilibrium payoffs of this game and show that when the market feedback (i.e., how much past consumer surplus affects future market sizes) increases, welfare may decrease in the Pareto sense.

Supplemental material

Supplement pages: 45

Keywords: Informational intermediary, market size, market feedback, consumer surplus, Pareto-inferior outcomes, Markov perfect equilibrium

JEL Classification Codes: C73D61D82D83L15M37

See CFDP Version(s): CDFP 2321R
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