Do consumers benefit from more-informed firms?

Authors: Christian Kubitza (Goethe University)

Title: Do consumers benefit from more-informed firms?

Abstract: We study market equilibria and social welfare when risk-neutral firms and risk-neutral or risk-averse individuals are uncertain about the present value of assets. We show that, once firms have more information than individuals, the existence of a Nash equilibrium cannot be guaranteed. If it exists, it involves convex pricing and positive expected profits for firms. A smaller estimation error of firms reduces profits for firms and increases individuals' expected wealth in equilibrium, but at the same time makes an equilibrium less likely. We conclude that estimation errors have a profound impact on market prices and welfare.