050613

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050613

  1. 1. Limited InformationMay 6, 2013
  2. 2. How was the exam?A. EasyB. Just RightC. Hard / FairD. Too Hard / Not Fair
  3. 3. What was most useful?A. Practice examsB. Homework assignmentsC. Class notesD. Not one more than others
  4. 4. What was least useful?A. Practice examsB. Homework assignmentsC. Class notesD. Not one more than others
  5. 5. Announcements• TAs are still grading exams– We’ll let you know when they’re ready and how tosee your score.• Two homework assignments now posted.– Ch 12 (material covered this week in class) duethis Friday, May 10– Ch 13 (material covered next week in class) duethis Monday, May 13
  6. 6. Last Class• Finished our discussion of externalities• Key understanding: How efficiency can berestored when externality causes inefficiency• Restoring efficiency was also underlyingmotivation when studying– market power– games• Recall: ``efficiency’’ = perfect competitionoutcome
  7. 7. Perfectly competitive markets• Firms have no influence over what the goingprice in the market is.– ``Price-takers.’’• Characteristic of perfectly competitivemarkets:– All firms sell the same (really the same!) product.– There are many buyers and sellers.– There are no costly barriers to starting a business.– Both consumers and firms are well-informed.
  8. 8. Perfectly competitive markets• Firms have no influence over what the goingprice in the market is.– ``Price-takers.’’• Characteristic of perfectly competitivemarkets:– All firms sell the same (really the same!) product.– There are many buyers and sellers.– There are no costly barriers to starting a business.– Both consumers and firms are well-informed.
  9. 9. Learning Goals for Today• Be able to list many markets where consumershave limited information• Same for producers• Explain the sources of the free-rider problemin this context.
  10. 10. What is ``Incomplete Information?’’• First, what is the worth of ``completeinformation’’ to the consumer?– Consumers can make rational decisions aboutmarginal benefits (the demand line!)• How about to the producer?– Producers can make rational decisions aboutmarginal costs (the supply line!)
  11. 11. How much are you willing to pay for asmall cup of coffee?A. $0-0.50B. $0.50-1C. $1-1.50D. $1.50-2E. $2+
  12. 12. Here you go.A. $0-0.50B. $0.50-1C. $1-1.50D. $1.50-2E. $2+
  13. 13. Asymmetric InfoHow small is ``small?’’Consider the opposite ifyou were a seller: how largeis ``small’’?
  14. 14. Markets with Incomplete InformationConsumers ProducersSpend a minute and try to think of some /write some down.
  15. 15. In which consumer market isinformation most valuable?Consumers Producers
  16. 16. In which producer market isinformation most valuable?Consumers Producers
  17. 17. Lemons• Cars, or other consumer items, that havehidden problems are known as “lemons.’’• Why is it hard to tell in the case of a car?
  18. 18. Your reservation price for a good used car is $5000.For a lemon is $1000. Given 20% of all cars arelemons, we can predict that• only lemons sell, for $1k each.• both types of cars sell, for $4200 each.• only good cars sell, fro $4200 each.• both reliable cars and lemons will sell for $1keach.
  19. 19. Expected Value• You can’t tell if a car is a lemon.• Therefore, your valuation is its expected value.• -> Should pay its expected value.
  20. 20. How much information?.Markets that people Markets that peopleresearch before buying. research until MB=MC.
  21. 21. Will the Market Provide the OptimalLevel of Information?• In theory, information could be bought and sold just like any other good orservice.• BUT because information can be easily transferred from one person to thenext, it’s hard to keep people who don’t pay for information from benefittingfrom it.• Leads to a free-rider problem: any situation in which too little of a good orservice is produced because you can’t exclude people who don’t pay for agood or service from benefitting from it.
  22. 22. Will the Market Provide the OptimalLevel of Information?• People’s individual willingness to pay for information will be lessthan the social benefit of the information (since the informationcan costless be transferred to others).– Similar to the existence of a positive externality• Markets will provide too little information.
  23. 23. Will the Market Provide the OptimalLevel of Information?• Example: go to Best Buy to learn about HDTVs, then buy online.– Best Buy covers the cost of the information it provides bycharging a little more.– If no one willing to pay the extra for a TV from Best Buy, BestBuy will have a hard time providing good customer service.
  24. 24. Show-RoomingRise of smart-phones has resulted in consumersgoing to individual stores, and then searchingfor same product online to find similar prices.What are some examples?
  25. 25. Show-RoomingRise of smart-phones has resulted in consumersgoing to individual stores, and then searchingfor same product online to find similar prices.What is the ``story?’’
  26. 26. Show-RoomingRise of smart-phones has resulted in consumersgoing to individual stores, and then searchingfor same product online to find similar prices.How do we think about it economically?

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