Selling Correlated Information Products

TL;DR

This paper analyzes how consultants price and sell correlated information products to clients with private information and willingness to pay, revealing conditions for full surplus extraction and optimal pricing structures.

Contribution

It introduces a model of selling correlated information where the seller can extract full surplus and characterizes optimal pricing strategies based on correlation levels.

Findings

Full surplus extraction possible under certain cost conditions

Low and high-value buyers receive no information rents

Pricing structures like flat or hourly rates are optimal under high or low correlation

Abstract

How do consultants price expertise? This paper studies a problem of selling information products (expertise) to a buyer (client) who faces decision-making problem under uncertainty. The client is privately informed about the type of expertise she needs and her willingness to pay (WTP) for additional information. A monopolist seller (consultant) designs and sells information products as Blackwell experiments over the underlying states associated with each client-specific desired expertise. Because there is correlation across states, a client with high WTP may find it profitable to purchase information about a low type's state, whenever correlation is sufficiently high. I find that the consultant can extract full (socially efficient) surplus whenever such (marginal) gains do not exceed the (marginal) costs of buying cheaper, but noisier information. Otherwise, unlike typical results in mechanism design, I find that buyers with low and sufficiently high value for information get no information rents, and only the "middle" types enjoy positive surplus. Common pricing structures observed in practice, like flat/hourly rates or value-based fees, are obtained as optimal contracts if correlation across states is sufficiently high or low, respectively.