The Journal Of Political Economy

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Published on October 15, 2008

Author: maddy3

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THE JOURNAL OF POLITICAL ECONOMY THE ECONOMICS OF INFORMATION George J. Stigler

BACKDROP Information is a valuable resource Mostly it is ignored Information producing industry ‘Advertising’ is treated with hostility Important problem of information – ascertainment of market price

Information is a valuable resource

Mostly it is ignored

Information producing industry ‘Advertising’ is treated with hostility

Important problem of information – ascertainment of market price

NATURE OF SEARCH Prices change frequently and no one will know all prices that seller will quote at given time Buyer who wants to know must canvass various sellers Lot of dispersion in price of the sellers Price dispersion-ignorance in market But not all products are completely homogeneous

Prices change frequently and no one will know all prices that seller will quote at given time

Buyer who wants to know must canvass various sellers

Lot of dispersion in price of the sellers

Price dispersion-ignorance in market

But not all products are completely homogeneous

NATURE OF SEARCH But its metaphysical and fruitless to say that all dispersion is due to heterogeneity Buyer content with price if he wants to buy from first seller only If dispersion is high (relative to cost of search) then he will canvass several sellers The cost of search proportionate to number of sellers identified

But its metaphysical and fruitless to say that all dispersion is due to heterogeneity

Buyer content with price if he wants to buy from first seller only

If dispersion is high (relative to cost of search) then he will canvass several sellers

The cost of search proportionate to number of sellers identified

NATURE OF SEARCH The cost not equal to all consumers- eg- time more important for people with higher income- optimum value found Sellers can also search- optimum value With unique goods efficiency of personal search is low Cost of search higher in case of powerful inducement of local transactions

The cost not equal to all consumers- eg- time more important for people with higher income- optimum value found

Sellers can also search- optimum value

With unique goods efficiency of personal search is low

Cost of search higher in case of powerful inducement of local transactions

NATURE OF SEARCH Advertisement is important tool to identify buyers and sellers Classifieds drastically reduces cost of search But its expensive especially incase of goods that have few potential buyers Situation where traders chief service is to provide meeting place for buyers and sellers

Advertisement is important tool to identify buyers and sellers

Classifieds drastically reduces cost of search

But its expensive especially incase of goods that have few potential buyers

Situation where traders chief service is to provide meeting place for buyers and sellers

DETERMINANTS OF SEARCH Correlation between time and price Goodwill defined as continued patronage of buyers without continued search Tourists pay more for product because of lack of information Dispersion is a function of average amount of search and which is a function of nature of commodity Concept of pooling

Correlation between time and price

Goodwill defined as continued patronage of buyers without continued search

Tourists pay more for product because of lack of information

Dispersion is a function of average amount of search and which is a function of nature of commodity

Concept of pooling

SOURCES OF DISPERSION Knowledge becomes obsolete Prices and demand change over time Sellers cannot maintain perfect correlation because of cost of search Component of ignorance due to changing identity of buyers and sellers New buyers and sellers Size of market Monopolic source of information

Knowledge becomes obsolete

Prices and demand change over time

Sellers cannot maintain perfect correlation because of cost of search

Component of ignorance due to changing identity of buyers and sellers

New buyers and sellers

Size of market

Monopolic source of information

ADVERTISING Method of providing potential buyers with knowledge of identity of sellers Tool for eliminating ignorance Advertisement to identify sellers, identify buyers, and price Seller pays for advertisement because buyer does not have preference for all advertisements Should buyers buy advertisement?

Method of providing potential buyers with knowledge of identity of sellers

Tool for eliminating ignorance

Advertisement to identify sellers, identify buyers, and price

Seller pays for advertisement because buyer does not have preference for all advertisements

Should buyers buy advertisement?

Cannot inform about every change in price The cost of search is a cost of purchase, the consumption therefore will be smaller, the greater the dispersion of prices and greater optimum amount of search

Cannot inform about every change in price

The cost of search is a cost of purchase, the consumption therefore will be smaller, the greater the dispersion of prices and greater optimum amount of search

CONCLUSIONS The identification of seller and price is just a part of search of information Useful in profits, investment, quality of goods etc Reputation demands price because it economizes on search Ignorance is like winter- information will prevent you from cold winds

The identification of seller and price is just a part of search of information

Useful in profits, investment, quality of goods etc

Reputation demands price because it economizes on search

Ignorance is like winter- information will prevent you from cold winds

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