When Does Product Information Reduce Market Competition?

Consumers nowadays have access to increasingly large volume of product information. Understanding how such product information affects market competition has significant implications for firms' marketing and pricing strategies. Prior academic research, however, has proposed two conflicting but equally popular arguments in this regard. On the one hand, it is widely believed that product information increases product differentiation perceived by consumers, therefore reducing market competition. On the other hand, it is well established that uncertainty about product features can soften market competition, at least among close substitutes; product information reduces such uncertainty, therefore increasing market competition. The conflicting messages create confusions among business practitioners. This paper reconciles the two arguments using a horizontal differentiation model. We show a simple condition under which product information always reduces market competition. When the condition is violated, product information always reduces overall product differentiation perceived by consumers, which might lead to higher market competition. Besides reconciling the two conflicting arguments, this paper provides an alternative explanation on how product information reduces market competition. We show that product information can reduce market competition without increasing overall product differentiation. Instead, it reduces market competition by reducing uncertainty of product differentiation perceived by consumers. This is because market competition is disproportionally influenced by consumers who perceive competing products too close to each other. Product information simultaneously reduces the likelihoods that competing products being perceived too close to or too far away from each other, resulting in net reduced market competition