Arrow's Paradox and Competitive Markets for Information



Arrow’s information paradox asserts that competitive markets for information, where intellectual property rights are absent, cannot exist. Contrary to the paradox I show that demand for information is not indeterminate. The value of information for the buyer depends on its relevance, which can be known ex ante, whereas what remain uncertain are the capability of the seller to possess the knowledge and her reliability in disclosing it. These three together form the reservation price of the buyer. Furthermore, differences in capability and reliability between sellers can overcome the appropriability problem, in which the seller loses her monopoly after the first purchase.

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Enrico Pennings