Abstract:

We study the welfare effects of ambiguous product information for a buyer with α‐max‐min preferences and a price‐setting seller. The buyer privately receives information about her valuation. We show that both the seller and the buyer can benefit when this information is ambiguous, and we characterize all possible combinations of producer and consumer surplus, as evaluated under ambiguity‐sensitive preferences. Ambiguity concerning the valuation perceived by the buyer when making the purchase decision can induce the seller to change the price. Before receiving information, ambiguity concerning the purchase decision can make the buyer optimistic about buying only for high valuations, which relaxes the participation constraint.

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