Market-Minded Informational Intermediary: Unintended Welfare Loss and Market Stagnation; Yang Kai Hao (Yale University)

Abstract

This paper studies the impact of information intermediation on market outcomes. We consider a dynamic game in discrete time. In each period, a short-lived seller sets the price of a product and sells it to consumers through a long-lived informational intermediary. After observing the price, the intermediary discloses information about the product to consumers, and earns a fixed percentage of the sales revenue in each period. The market size evolves throughout time, with growth rates depending on consumer surplus in the previous period. We characterize the set of subgame perfect equilibrium payoffs of this game. This characterization leads to our main results: (i) When restricting to stationary equilibria, generically the market never grows and the equilibrium outcomes can be Pareto-ranked---the equilibrium outcome is less efficient if the market growth rate is more sensitive to consumer surplus. (ii) When the market growth rate is moderately sensitive to consumer surplus, there exists a subgame perfect equilibrium outcome in which the market never grows and is Pareto-dominated by all other equilibrium outcomes, and this outcome is decreasing in the Pareto sense as the sensitivity increases.