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The Journal Of Political Economy

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The Journal Of Political Economy

  1. 1. THE JOURNAL OF POLITICAL ECONOMY THE ECONOMICS OF INFORMATION George J. Stigler
  2. 2. BACKDROP <ul><li>Information is a valuable resource </li></ul><ul><li>Mostly it is ignored </li></ul><ul><li>Information producing industry ‘Advertising’ is treated with hostility </li></ul><ul><li>Important problem of information – ascertainment of market price </li></ul>
  3. 3. NATURE OF SEARCH <ul><li>Prices change frequently and no one will know all prices that seller will quote at given time </li></ul><ul><li>Buyer who wants to know must canvass various sellers </li></ul><ul><li>Lot of dispersion in price of the sellers </li></ul><ul><li>Price dispersion-ignorance in market </li></ul><ul><li>But not all products are completely homogeneous </li></ul>
  4. 4. NATURE OF SEARCH <ul><li>But its metaphysical and fruitless to say that all dispersion is due to heterogeneity </li></ul><ul><li>Buyer content with price if he wants to buy from first seller only </li></ul><ul><li>If dispersion is high (relative to cost of search) then he will canvass several sellers </li></ul><ul><li>The cost of search proportionate to number of sellers identified </li></ul>
  5. 5. NATURE OF SEARCH <ul><li>The cost not equal to all consumers- eg- time more important for people with higher income- optimum value found </li></ul><ul><li>Sellers can also search- optimum value </li></ul><ul><li>With unique goods efficiency of personal search is low </li></ul><ul><li>Cost of search higher in case of powerful inducement of local transactions </li></ul>
  6. 6. NATURE OF SEARCH <ul><li>Advertisement is important tool to identify buyers and sellers </li></ul><ul><li>Classifieds drastically reduces cost of search </li></ul><ul><li>But its expensive especially incase of goods that have few potential buyers </li></ul><ul><li>Situation where traders chief service is to provide meeting place for buyers and sellers </li></ul>
  7. 7. DETERMINANTS OF SEARCH <ul><li>Correlation between time and price </li></ul><ul><li>Goodwill defined as continued patronage of buyers without continued search </li></ul><ul><li>Tourists pay more for product because of lack of information </li></ul><ul><li>Dispersion is a function of average amount of search and which is a function of nature of commodity </li></ul><ul><li>Concept of pooling </li></ul>
  8. 8. SOURCES OF DISPERSION <ul><li>Knowledge becomes obsolete </li></ul><ul><li>Prices and demand change over time </li></ul><ul><li>Sellers cannot maintain perfect correlation because of cost of search </li></ul><ul><li>Component of ignorance due to changing identity of buyers and sellers </li></ul><ul><li>New buyers and sellers </li></ul><ul><li>Size of market </li></ul><ul><li>Monopolic source of information </li></ul>
  9. 9. ADVERTISING <ul><li>Method of providing potential buyers with knowledge of identity of sellers </li></ul><ul><li>Tool for eliminating ignorance </li></ul><ul><li>Advertisement to identify sellers, identify buyers, and price </li></ul><ul><li>Seller pays for advertisement because buyer does not have preference for all advertisements </li></ul><ul><li>Should buyers buy advertisement? </li></ul>
  10. 10. <ul><li>Cannot inform about every change in price </li></ul><ul><li>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 </li></ul>
  11. 11. CONCLUSIONS <ul><li>The identification of seller and price is just a part of search of information </li></ul><ul><li>Useful in profits, investment, quality of goods etc </li></ul><ul><li>Reputation demands price because it economizes on search </li></ul><ul><li>Ignorance is like winter- information will prevent you from cold winds </li></ul>

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