Information Exchange and Consumer Search

Many benchmarks in over-the-counter markets, such as LIBOR, are formed based on the submission of banks’ interbank interest rates. Benchmarks are important, as they help consumers to search and provide firms with a basis for price setting. This paper explores firms’ incentives to contribute information about their costs for the purpose of benchmark formation. We show that benchmarks reduce price variance and lead consumers to search less. As a result, firms charge higher prices and consumers end up buying from less efficient firms, which negatively affects total welfare. We find that in order to deter consumer search, firms find it optimal to share their private costs if the search friction is sufficiently high. Moreover, the reduction of search in these markets can dramatically decrease welfare even when consumers are not aware of the content of the information exchange, but observe that it took place.