Dual Pricing and the Information Deficit in Electronic Markets Panos M. Markopoulos CS Dept. University of Pennsylvania Ravi Aron Wharton School University of Pennsylvania Lyle H. Ungar CS Dept. University of Pennsylvania Abstract We model the availability of product information in Internet-based markets, and explain the underlying causes for the phenomenon of less than perfect information available to consumers of products and services in these markets. We use Salop’s model of product differentiation and explore the conditions under which sellers make horizontal information available to buyers. We demonstrate that under broad conditions, if sellers are unable to charge buyers for product information, in the presence of even very small costs associated with the dissemination of information they will choose to provide just enough information to distinguish their products from their competitors’ and no more than that. Furthermore, we show that a market for product information can partly correct this inefficiency and predict that product information will begin to be traded once an appropriate micro-transaction payment scheme becomes available. It follows from our analysis that allowing sellers to charge an information rent leads to more efficient markets. 1 Introduction 1 Several articles appearing in the trade and business press have noted that while elec- tronic markets could potentially feature fine grained information about all attributes of a product or service, they rarely do. For instance, very few Realtors offer three dimensional views of the interior of homes or the school district’s performance statis- tics on their web sites. Similarly on-line travel agents do not offer information about airline movie schedules on long haul flights to even first class travellers even as on- line retailers of high end stereo systems do not offer detailed information about the 1 Working Version Nov. 22nd 2002 1