Benefits and Challenges of Ambiguous Product Information
Lang & Wasser "Benefits and Challenges of Ambiguous Product Information" CRC Discussion Paper No. 564
We’ve all been there: scrolling through Amazon reviews or following social media, trying to decide if a product is actually worth the hype. You probably hoped the information was accurate. Yet in many markets, consumers face information that is incomplete, hard to verify, or potentially biased. Online reviews may be manipulated, influencers’ endorsements may be sponsored, and technical descriptions may leave out important details.
Is that five-star review genuine, or paid for? Is the product description telling the whole story?
New research by Matthias Lang (LMU Munich, Project B02) and Cédric Wasser (University of Basel) examines how such ambiguous information affects trade between a price-setting seller and an ambiguity-sensitive buyer.
The buyer with α-max-min preferences doesn’t just settle on one interpretation when faced with mixed signals. Instead, she weighs the most pessimistic interpretation (the product is junk) against the most optimistic interpretation (the product is life-changing). The parameter α represents her degree of pessimism. A high α makes her a heavy skeptic, while a lower α makes her more optimistic. The authors demonstrate that both the seller and the buyer can surprisingly benefit from this kind of ambiguous information.
Ambiguity can make the buyer more cautious. When product information is ambiguous, the buyer also considers pessimistic interpretations of reviews, which naturally lowers the maximum price she is willing to pay. The seller, anticipating this drop in demand, faces a choice: keep prices high and lose the sale, or drop the price to lure the skeptical buyer back. Through this mechanism, called interim pessimism, ambiguity softens the seller’s pricing power – resulting in lower prices and revenue than would prevail under any unambiguous information.
On the flip side, ambiguity can also serve the seller’s interests. When a buyer is optimistic about her ability to avoid poor purchase decisions, she is much more likely to stay in the market (relaxing her participation constraint). Because she also considers optimistic interpretations of reviews, her willingness to pay can actually increase. Together, these effects, called interim and ex ante optimism, allow the seller to raise prices, sometimes generating revenue that exceeds the buyer’s initial expected valuation. Under unambiguous information, such an outcome would be impossible.
Using information design theory, the authors fully characterize all possible outcomes for consumer and producer surplus. Their results show that ambiguity expands the Pareto frontier: some combinations of consumer and producer surplus can be achieved under ambiguity that simply cannot be reached without ambiguity.
For policymakers, regulators, and researchers interested in market design or procurement, these results carry an important lesson: Full transparency is not always welfare-enhancing. Instead, a nuanced understanding of how information influences pricing strategies is essential to evaluate policies.
Link (pdf): Benefits and Challenges of Ambiguous Product Information
