The Cost of Information: The Case of Constant Marginal Costs

TL;DR

This paper introduces an axiomatic framework for understanding information acquisition costs under constant marginal costs, providing a clear economic interpretation of the parameters involved.

Contribution

It develops a novel axiomatic theory capturing constant marginal costs in information production, with parameters that reflect the difficulty of distinguishing states.

Findings

Cost of signals is additive for independent signals

Generating a half-probability signal costs half as much as the full-cost signal

Parameters have a clear economic interpretation related to state distinguishability

Abstract

We develop an axiomatic theory of information acquisition that captures the idea of constant marginal costs in information production: the cost of generating two independent signals is the sum of their costs, and generating a signal with probability half costs half its original cost. Together with Blackwell monotonicity and a continuity condition, these axioms determine the cost of a signal up to a vector of parameters. These parameters have a clear economic interpretation and determine the difficulty of distinguishing states.