The benefit of information asymmetry: When to sell to informed customers?

• Authors: Hemant K. Bhargava;Rachel R. Chen
• Venue: Decision Support Systems
• Year: 2012

Buyers are often uncertain about product valuations before they commit to purchase. In such situations, firms have an opportunity to influence the accuracy with which buyers can estimate their valuations. When buyers are uncertain about the product's fit with their personal preferences, firms can help resolve this uncertainty by offering product previews, sampling, trials or return guarantees. When a buyer's valuation uncertainty is caused by unpredictability in their consumption state, firms can choose advance selling - which makes buyers decide while they are unsure about their valuations - or enable buyers to make an informed decision by offering spot sales. This paper examines firms' incentive to adopt mechanisms that endow buyers with private information - hence increase information asymmetry against the firm - and are mean preserving in the aggregate across the market. Prior studies suggest that in this setting, selling to uninformed buyers is advantageous because it presents the firm with a narrower dispersion in valuations, making it easier to extract consumer surplus. Countering this intuition, we show that when the market consists of distinct heterogeneous consumer segments ex ante, selling to privately informed buyers can improve the firm's profit. This is because under certain conditions, the demand curve can become flatter in a relatively high price range as buyers become informed, enabling the firm to extract higher surplus. Our work suggests that firms may want to employ product preview mechanisms even when they increase dispersion in valuations while only maintaining (rather than increasing) the mean. Our study highlights the interplay between buyer valuation uncertainty and consumer heterogeneity in determining a firm's selling strategy.