The Economics of Information

Full course description

This course studies markets for information goods and gives an introduction to the economics of uncertainty and information.

The term “information good” is very broad and includes, in principle, everything that can be digitized, such as books, databases, music, etc. As a consequence, trade often takes place via the Internet. Information goods have special characteristics. For example, they typically have a special cost structure with high fixed costs but low marginal costs: making a copy of digital content has essentially no cost. We study several topics such as pricing, network effects, and lock-in. One focus will be on “platforms” (e.g., Apple’s App Store, Google Search Engine, Netflix), which are often key players in markets for information goods.

At the beginning, we introduce concepts from pricing and game theory, reviewing and extending contents of SSC1027 Principles of Economics. These concepts are useful because markets for information goods are often competitive but not perfectly competitive. Thus, firms can experiment with pricing and selling strategies, but they must take into account how potential competitors will respond.

The economics of uncertainty and information studies the role that information plays in the decisions and interactions of individuals, the design of contracts, and the working of markets.  In many situations, individuals lack important information before making a decision. For example, sellers don’t know their customers’ willingness to pay, and investors don’t know which investment opportunities yield the highest profit. Often, information is not only incomplete but also asymmetrically distributed among the relevant parties (“adverse selection”, “moral hazard”). Examples include job applications, where the applicant knows more about his/her abilities than the employer, or insurance contracts, where the insurance company cannot observe the insuree’s effort in preventing damages. A central insight is that asymmetric distribution of information often leads to economic inefficiency.