Too much information? Information gathering and search costs.

Seminars - Department Seminar Series
12:45 - 14:00
Via Roentgen 1, 4th floor, room 4.E4.SR03

A seller often needs to determine the amount of product information to provide to consumers. We model costly consumer information search in the presence of limited information. We derive the consumer's optimal stopping rule for the search process. We find that, in general, there is an intermediate amount of information that maximizes the likelihood of purchase. If too much information is provided, some of it is not as useful for the purchase decision, the average informativeness per search occasion is too low, and consumers end up choosing not to purchase the product. If too little information is provided, consumers may end up not having sufficient information to decide to purchase the product. The optimal amount of information increases with the consumer's ex-ante valuation of the product. One can also show that there is an intermediate amount of information that maximizes the consumer's expected utility from the search problem (social welfare under some assumptions). Furthermore, this amount may be smaller than that which maximizes the probability of purchase. That is, the market outcome may lead to information overload with respect to the social welfare optimum. The paper can be seen as providing a rationale for why too much information may hurt consumer decision-making.

J. Miguel Villas-Boas (University of California, Berkley)