Information Transparency Hypothesis:

Economic Implications of Information Transparency in Electronic Markets

(Advances in the Economics of Information Systems)

Kevin Zhu

Abstract

This paper explores the private and social desirability of information transparency of business-to-business (B2B) electronic markets that provide online platforms for information transmission. The abundance of transaction data available on the Internet tends to make information more transparent in the digital B2B environment. In such a transparent environment, it becomes relatively easier for firms to obtain information that may allow them to infer their rivals�� costs than in a traditional, opaque market. Then, how does this benefit firms participating in the B2B markets? To what extent does information transparency affect consumers and the social welfare in a broader sense? Focusing on the informational effects, this study explores firms�� incentives to join a B2B market by developing a game-theoretic model under asymmetric information. We then examine its effect on expected profits, consumer surplus, and social welfare. Our results challenge the ��information transparency hypothesis�� (i.e., open sharing of information in electronic markets is beneficial to all participating firms). In contrast to the popular belief, we show that information transparency could be a double-edged sword. Although its overall effect on social welfare is positive, its private desirability is deeply divided between producers and consumers, and even among producers themselves.

Key words

Information transparency, economics of electronic markets, information economics, welfare implications, online exchange, game theory, information transparency hypothesis