HOW DO INFOMEDIARIES AFFECT FIRMS' INFORMATION STRATEGIES, AND HOW DO THEY IMPACT BUYER AND SOCIAL WELFARE?

Product information websites have become ubiquitous. This article explores their impact on firm profitability, consumer surplus, and social welfare. Using an analytical model, we show that firms take advantage of such infomediaries and cut down on their own information investments, increasing their profitability. Surprisingly, we find that the existence of these websites may be reducing social welfare, even if we ignore their cost of operation. In addition, and contrary to the common belief that product information websites are good for buyers, we show that they may be hurting consumers, even when their goal is to maximize consumer surplus. These findings lead us to recommend that product information websites should focus on roles that complement, rather than substitute, the information disclosure investments that firms freely choose on their own accord.