Marketing Information: A Competitive Analysis

Selling information that is later used in decision making constitutes an increasingly important business in modern economies (Jensen Jensen, Fred O. 1991. Information services. Congram, Friedman, eds. The AMA Handbook of Marketing for the Service Industries, Chapter 22. AMA-COM, New York, 423–443.). Information is sold under a large variety of forms: industry reports, consulting services, database access, and/or professional opinions given by medical, engineering, accounting/financial, and legal professionals, among others. This paper is the first attempt in marketing to study competition in the rapidly emerging information sector. Specifically, we are interested in answering the following questions: (1) Is competition fundamentally different when competing firms sell information rather than traditional goods and services, and—if yes—why? (2) What are the implications of such differences for decision makers (marketers and regulators)? (3) Can we explain some of the observed marketing strategies in the information industry? As such, the audience of the paper includes academics as well as professionals who are interested in understanding what is specific about competition in information markets. Familiarity with the practical implications of such differences and understanding of the mechanisms that drive them is essential for those who are faced with the problem of marketing information. To answer the above research questions we build a simple game-theoretic model that consists of two firms selling information to a population of consumers who are heterogeneous in their willingness to pay for the quality of information. The most important features of the model are the following. Information products sold by the two firms are modeled as random draws from two normal distributions having equal mean. The variances of these distributions and their correlatedness constitute the product-attribute space, which is assumed to be common knowledge. Consumers are interested in assessing the mean of the distributions and to do so they can buy the sample from any of the firms or they can buy both samples and combine them to obtain a more accurate estimate. Quality of information is linked to the accuracy of consumers' estimate of the mean which in turn is influenced by the accuracy of each sample as well as by their correlatedness. Consumers' utility depends on the quality of information they purchased, on their inherent utility for quality (taste), and on the total price they paid to acquire information. Knowing consumer preferences, firms simultaneously price their information products. The main finding of the paper is that information markets face unique competitive structures. In particular, the qualitative nature of competition changes depending on basic product characteristics. While traditional products and services compete either as substitutes or as complements in the relevant product-attribute space, information may be one or the other, depending on its position within the same product-attribute space. Said differently, the nature of competition changes qualitatively with a continuous change in basic product-attribute levels. The intuition behind this finding is the following. When purchasing information, consumers facing important decisions may find it beneficial to purchase from several information sellers. This is more likely to happen when the reliability of information is low and the sources of information are independent. Under such conditions information products tend to be complements and, as a result, competition between sellers is relatively mild. In the opposite case, when information is reliable and/or sellers' sources are highly correlated, consumers are satisfied after consulting a single source. In this case, information products are substitutes and sellers tend to undercut one another's prices to induce consumers to choose their brand. Understanding this discontinuity in competitive structures has important implications for decision makers as very different strategies are optimal under different product characteristics. Under substitution, traditional strategies to avoid competition (e.g., differentiation) are recommended. When the competing products' reliability is generally low (they are complements) firms are better off accommodating competition. In fact, we find that a firm may benefit from “inviting” a competitor. Finally, our findings are also important for regulators of information markets. As the literature on complementarity suggests, price fixing agreements between firms offering complementary products may benefit firms as well as consumers.