When does Information Determine Market Size? Search and Rational Inattention

Speaker: Dr Costas Cavounidis, University of Warwick

I develop a model in which optimal costly information acquisition by individual firms causes adverse selection in the market as a whole. Each firm's information acquisition policy determines which customers they provide to, and that in turn affects the distribution of customers remaining in the market and hence other firms' incentives. I show that if firms can finely tune the information acquired, this externality is blunted and in equilibrium all firms in the market will profit. By contrast, with restricted signal choice, only a limited number of firms can be profitable. In such a setting, the maximum number of profitable firms fails to increase with the number of potential customers.