Bargaining over Data: When Does Making the Buyer More Informed Help?

Data are critical to decision making for many businesses, and there is a growing market for proprietary data that can improve business decisions. It is not surprising, therefore, that a growing list of companies is generating substantial revenue by selling proprietary data collected as part of their doing business. Because data are an experience good, their true valuation remains uncertain to both sellers and buyers. As a result, firms often resort to bargaining to arrive at a mutually acceptable arrangement. We consider the situation where the seller can offer a data demonstration to the buyer to reduce the valuation uncertainty. A data demonstration can increase the buyer’s willingness to pay; however, it also puts the seller at an information disadvantage in the bargaining process. Interestingly, we find that there are circumstances under which the presence of the seller’s outside option can trigger a demonstration with complete information, even if the buyer does not underestimate data value. We also find that sellers need to offer different demonstration strategies—sometimes to just correct underestimation bias and sometimes to correct bias and reduce uncertainty. If the development of the demonstration comes at a cost, we find that it is optimal for the seller to provide demonstrations that are only partially informative when the seller’s outside option is moderately high. Because having an outside option can help in the bargaining process, sellers should actively try to identify an outside option as a prebargaining step.