Direct and Indirect Sale of Information

Direct and Indirect Sale of Information

1986Working Paper No. 899

We compare two methods for a monopolist to sell information to traders in a financial market. In a direct sale, buyers of the information observe (versions of) the seller's signal and subsequently use it to make investment decisions. Alternatively, the seller can create a portfolio based on his private information and sell shares to traders. For the case of identical traders we show that if the pricing of shares is linear then there is a tradeoff between surplus extraction that is possible with direct sale and the more effective control of the usage of the information that is possible with indirect sale. The optimal selling method depends on the extent to which information is revealed by the asset equilibrium price. With general pricing schemes indirect sale is strictly more profitable. The results may be different if traders have heterogeneous private information and there is more than one risky asset.