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Direct and Indirect Sale of Information

Anat R. Admati and Paul Pfleiderer
Econometrica
July, 1990
Vol. 58, Issue 4, Pages 901-928

In this article we compare two methods for a monopolist to sell information. In a direct sale buyers observe the seller's signal (or noisy versions of it) and subsequently use what they observe to make investment decisions. In an indirect sale the seller creates a portfolio based on his private information and then sells shares to the traders. Indirect sale allows the seller to control more effectively the buyers' reactions to the information, but may not allow as much surplus to be extracted as is possible with direct sale. We show how the optimal selling method depends on the extent to which information is revealed by assets' equilibrium prices.