Optimal Pricing of Information

TL;DR

This paper characterizes the revenue-maximizing mechanism for selling information that influences decision-making, revealing whether the state exceeds a threshold after eliciting buyer type, combining price and information discrimination.

Contribution

It provides a closed-form solution for the optimal information selling mechanism, integrating price and information discrimination strategies.

Findings

Optimal mechanism charges upfront and reveals threshold-based information.

Buyer type indifferent between actions benefits most.

Mechanism combines price discrimination with information discrimination.

Abstract

A decision maker is choosing between an active action (e.g., purchase a house, invest certain stock) and a passive action. The payoff of the active action depends on the buyer's private type and also an unknown state of nature. An information seller can design experiments to reveal information about the realized state to the decision maker, and would like to maximize profit from selling such information. We characterize, in closed-form, the revenue-optimal information selling mechanism for the seller. After eliciting the buyer's type, the optimal mechanism charges the buyer an upfront payment and then simply reveals whether the realized state exceeds a certain threshold or not. The optimal mechanism features both price discrimination and information discrimination. The special buyer type who is a-priori indifferent between the active and passive action benefits the most from participating in the mechanism.