The value of public information in vertically differentiated markets

Generating public information about vertically differentiated products increases expected vertical differentiation and softens competition. We show that this will induce firms to overinvest (underinvest) in information generation, if the deadweight loss in the subsequent market equilibrium is high (low). Moreover, information generation by one firm has a positive externality on the other firm. It follows that coordination (e.g. via industry associations) increases information generation. When product qualities are endogenous, information generation may prevent quality degradation and thus have an additional social benefit.