PDF ON ECONOMICS OF INFORMATION

4. New technology ―is transforming economic activity, as the
steam engine, railways and electricity have done in the past.‖
The New Economy: Beyond the Propaganda

5. The concept of information as we use it in everyday in the sense knowledge
communicated plays a central role in today's society. The concept became particularly
predominant since end of World War II with the widespread use of computer networks.
Given the central position of information in the New Economy, its approach is made
from the economic theory angle. Although the information is an Economic Good which
can be produced, consumed, buy and sell, the classical demand and supply laws do not
apply in case of Information. A lot of questions arise in this context: which is the cost of
producing information? Which is the cost of acquiring? Which is its value? Is there a
price of information like other commodities that are sold? Economic activity involves
making decisions. In order to make decisions, agents need Information. Thus, the
problem of acquisition, transmission, and uses of information has been occupying the
economists‘ attention for some time now. Some studies argue, in fact, that information
should not be treated in economic analyses as a traditionally economic good. The
purpose of this project is to present insights from economics research the nature of
information. Economic categories of cost and value are approached to evaluate the
information as economic good. The cost structure of an information, and also its value is
reflected to show that they are unusual compared to material goods or commodities.
A novel theory of the Consumer Market represents in which information plays the key
role. Consumers know only part of the available business offers and cannot ascertain
the quality of the products they desire and businesses have even less knowledge of what
consumer‘s desire. In the market consumers and businesses must find a match with
severely deficient information. Instead of optimization under the constraints, this
project focuses on how the information constraints can be gradually reduced. The
project shows that upon restraint education we do not come closer to the full
information limit typically portrayed in mainstream economics; rather both consumer
wants and business offers expand with associated new information deficiencies.
Therefore the consumer market is always in non-equilibrium and information will
always be deficient. This project argues that in the dynamic pursuit to reduce
information controls wealth is created and this is the main driving force that powers
economic growth.

6. CONTENTS
1. Introduction
2. Objective of the Study
3. Information
3.1 Meaning of Information
3.2 Definition of Information
3.3 Validity of Information
3.4 Cost and Value of Information
3.5 Characteristics of Information
3.6 Information Resources
3.7 Information Storage and Retrieval
3.8 Material Resources
3.9 Return on Investment
3.10 Information on the Internet
3.11 Information Gateways
3.12 Invisible Web
3.13 Subject Directories/Portals
3.14 Perfect Information versus Imperfect Information
3.15 Information as an Economic Good
3.16 Cost and Value of Information
3.17 The Librarian‘s View of Information
3.18 New Metaphors for Information
4. Economics of Information
4.1 Brief history and definitions
4.2. Theoretical background
4.2.1. Information and knowledge as economic categories
4.2.2. Information society – knowledge society – information economy – Knowledge
economy
4.3. Research findings
4.3.1 Information society with or without the knowledge economy
4.4 The Information Economy
4.4.1 Information as Bottleneck for Economic Transactions
4.4.2 The Gray Cognitive Zone
4.4.3 Information Institutions
4.4.4 The Fundamental Asymmetry
4.4.5 Diversification
4.4.6 Conclusion: The Non-equilibrium Paradigm

7. 5. Information as a Resource/Commodity
5.1 Information is a Resource / Commodity
5.1.1 Information is a Natural Resource
5.1.2 Information is a Vital Resource
5.1.3 Information is a Major Criterion
5.1.4 Information as a Thing
5.2 Satisfies the Economic Principle
5.2.1 Demand / Market
5.2.2 Information Generation
5.2.3 Protection
5.2.4 Consumption
5.2.5 Different Forms of Products
5.2.6 Transportation / Communication
5.2.7 Storage
5.3 Information is not a Resource / Commodity
5.3.1 Shareable and not Exchangeable (Public Good)
5.3.2 Assigning Value
5.3.3 Tax
5.3.4 Publicity
5.3.5 Expandable and Compressible
5.3.6 Non Materiality Problem
6. The Assessment Models of Knowledge-Based Economy Penetration
6.1 Reflection of Knowledge in Economy
6.2 Diversity of Knowledge Expression Assessment Models
6.3 Models of Comprehensive Knowledge Expression Assessment
6.4 Models of Sectorial Knowledge Expression Assessment
6.5 Elaborated Instrument for the Assessment of Knowledge Expression in
Economy
6.6 Conclusions
7. Limitations in the idea of Economics of Information
8. Gains from Idea of Economics of Information
9. Conclusions
10. References

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That information, knowledge and wisdom have economic value has been acknowledged
for many years. It may quote from the Christian Holy Bible:
"Happy is the man that findeth wisdom
and the man that getteth understanding
For the merchandise of it is better than
the merchandise of silver and the gain
thereof than fine gold"
This is extracted from the "Book of Proverbs", whose compilation started eight
hundred years before the present era. In spite of this, the idea that information (as
opposed to the information carriers such as manuscripts and books) is something that
should be paid for is not something that has been apparent to the general public, except
in the cases of military and industrial espionage. One of the first thinkers to posit the
coming of the "Information Age" was the economist Fritz Machlup and his predictions
generally included the proposition that information was an important commodity which
would form the basis of a new economic force.
For quite some time, there have been attempts to identify the information component of
products and to cost out the value of these. Peter Drucker, the management guru, for
instance has pointed out that in new industries information, as opposed to parts and
labour, is increasingly forming inputs to products. The cost of an automobile, for
example, is 40% material and 25% labour, whilst for a silicon chip the cost is 1%
materials 10% labour and 70% information. Even in the case of an automobile, the
proportion of information that is input to its manufacture is rising rapidly.
In the UK in the 1980's there was a heightened awareness of the commercial value of
information with the publication of a report entitled "Making a Business of
Information" which had been produced by an advisory group to the Government's
Cabinet Office called the Information Technology Advisory Panel (ITAP for short). The
recommendations of this report were warmly welcomed by the Government since it
provided further sources of profit, capitalized on a resource which the British were
good at exploiting and provided a further example of public resources (i.e. government
information) that could be exploited by the private sector. Mrs. Thatcher herself is
alleged to have said that she was greatly in favour of the "free flow of information but
not the flow of free information".
Information and its Economic nature is one that has plagued social scientists for
decades. As an economic category, the information takes some particular connotations.
These are conditioned by its role in making decision process or in the entropy
phenomenon, which usually appears in organization. Because of its quantifiable nature,
information has also particular characteristics related by their cost structure and value.

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The distinctive nature of information considered to be a main productivity factor in the
knowledge society, requires a comprehensive approach not only as a stored and
communicated collection of bits but as an economic good that has made the object of
trade and exchange. Even if the information has been analyzed since the last century in
a mathematical theory of communication, (Shannon, 1949; Craig, 2008), it has
remained a problematic concept in economic theory.
Information is the result of processing, manipulating and organizing data in a way that
adds to the knowledge of the receiver. Information, which is a catalyst for change, has
become as important as life itself. Information is substantially different from data in
that data are raw unevaluated messages. Information is the increase in knowledge
obtained by the recipient by matching proper data elements to the variables of a
problem (Ochai, 2007). Information, being awareness on a given situation or
phenomenon which propels one into action must be valid and usable. If valid but not
usable it is (outdated or obsolete). If usable but not valid it is (gossip or grapevine).
With the current trend of globalization as one of the elements of ICT, there is a
quantum of information available in libraries, resource centres and information
systems. However, ability to identify and retrieve specific information needed for a
particular situation requires an awareness of the source (availability) and the skill to
retrieve it within a short time and at low cost (accessibility). Recall or retrieval of
information is an operation which entails searching out and gaining access to specific
data elements from the medium where it is stored. Retrieval is of two-stage process:
first, a search of the appropriate address in the storage device; second recognition of the
item when it is contacted. An item may not be contacted if the information search is at
the wrong category, and also if the information is stored in such a disorganized and
confused manner that time-cost of searching the retrieval system is prohibitive.
Over the past quarter century, the rate of knowledge creation and dissemination has
increased significantly. Economic activities associated with the production and
utilization of information and knowledge has become an engine of economic growth in
the developed market economics, increasingly transforming all the other dimensions of
development and the entire society. The increased speed in the creation and
dissemination of knowledge has led to the rapid speed of modern and efficient
production techniques, plus the increased probability of leapfrogging, which has
consequently resulted in the world economy becoming much more competitive.
Reacting to the later situation in the transforming engines of economic development,
European Council in 2000 March in Lisbon adopted challenged plan for the future of
European Union. Strategic goal was defined bearing in mind both external challenges –
globalization – and internal constrains – Europe‘s response.
The scope of knowledge economy policy is vast. It is already functioning in the most
developed countries, but the analytical tools and indicators for mapping and measuring
it‘s performance are missing. Ideally, a research-policy agenda should encompass new
economic institutions and cultures, new technology paradigms and the ICT

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infrastructure, national and regional innovation systems – and systems – and human
capital, or the knowledge, skills and other attributes of the workforce (OECD, 1996,
2002). Different KBE assessment methodologies (many of them were not created with
intention to assess knowledge-based economy elements) have been prepared starting
from 1962 (F. Maclup, Hepworth, Small, Garfield, 1985; Leontief, 1993; Spencer, 2003;
Landefeld, Fraumeni, 2000; Trewin, 2002; Gera and ec. (1998), Houghton, Sheen, 2000;
Dahlman, 2003; Atkinson, 2002 and etc). Many different attempts exists in order to
assess the results of knowledge creation and application to economic, social, political or
even cultural spheres of countries. Such possible models are constructed by experts of
various international organizations like OECD, World Bank, APEC, ABS, UNECE.
One of the most structuralized and detailed model for knowledge assessment is
presented by Dahlman and Chen (2005). Regardless of the variety of possible Models of
the application of these is more or less complicated. This stimulates to search for more
flexible instrument for knowledge expression assessment which would enable researches
as well as practitioners to assess the penetration level of knowledge-based economy.
From the scientific as well as practical point of view it is important to analyze existing
Knowledge Expression Assessment Models and to constrain instrument for the
knowledge expression assessment. The object of research is Knowledge Expression
Assessment.

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i) The project provides the definition and basic concepts of Economics of Information.
ii) This project approaches the paradox of information goods‘ cost and value which is
derived from their characteristics.
iii) The project describes Information as resources and commodity as well as also
represents e-resources of Library.
iv) The project presents Models of production and distribution of knowledge or
information.
v) This project gives emphasis on Cost and Value of Information.
vi) This project gives focus on the view of Librarian‘s View on Information
vii) The project focus on the gains and limitations from economics of information or
knowledge and the related matters

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3.1 Meaning of Information:-
Historically the word has been used without decision or specificity in meaning. Average
person seems to know what is meant by information is a fact, news, sub-content of
knowledge.
At a more technical level the word is used as a noun as in ―give me that information I
need‖. But Information can almost become synonymous is with being informed in which
case. It takes the verbal form.
According to R. Fairthrone – ―Information is not stuff but a process. It is the process of
becoming informed which is being informed. Information is an attributed of a receiver
knowledge and interpretation of the signal, nor of the senders or some external itself.
According to this definition given by Fairthorne – information retrieval system does not
retrieve the information; it retrieves physical things, such as signals, data, documents.
These physical things may be perceived by somebody with appropriate prior knowledge
and suitable cognitive skills, contribute towards a change or increase in that person‘s
knowledge.
The term information is seen in the context of communication and seems to be linked to
the methods by which we obtain it.
Information - theoretically, any sign that can be conveyed and received is information
and, as far as human beings are concerned, anything that can stimulate any of the
senses is information. Information can be conveyed for the purposes of culture, leisure,
work, research and everyday life. Information is mainly considered as the use of
formalised documented information, produced and conveyed for a definite purpose.
Any of the following categories can be included in the concept of information:
Listings - a list identifying various carriers of information (i.e. books, journals, journal
studies, videos, films, records), without much digestion of the information contained in
them and with little or no classification.
Bibliographic References - These are detailed descriptions of the information carriers.
The descriptions are standardised and allow for easy identification of the carriers in
question. There may or may not be keywords or classification to indicate the content of
the material.
References Organised For Information Retrieval - This category covers the indexing
and abstracting services and contains sufficient information to select the carriers
required. Abstracts, especially, frequently have sufficient information to be used as
surrogates for the information carrier itself.
The Information Carrier Or a Copy thereof- i.e. the actual book, journal article, film,
manuscript, database entry etc.
Information extracted from the carrier or carriers and presented without comment.
Intelligence - information processed and digested and presented in an analysed form to
meet specific needs.

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Advice - information that is interpreted and presented, together with appropriate
experience, to meet a specific application.
3.2 Definition of Information :-
Information is a message conveyed on intended to be conveyed by a systematized body
of ideas or its accepted or acceptable substitute.-Definition given by Mr. Ganesh
Bhattacharya from LIS point of view.
According to Cleveland, Information is the core the sum total of all facts and ideas
accessible or not that are available to be known by somebody at a given moment, in
time.
As per Oxford English Dictionary, Information is knowledge, communication,
concerning some facts subjects or events.
According to Blumenthal, Information is data-recorded, classified, organized, related or
interpreted, within context to convey meaning.
According to Daniel Bell, Information is a pattern, or design that can be rearranges
data for instrumentation purposes.
According to Whyte, Information is the reduction of uncertainty.
According to Norbert Wiener, Information is information not matter and not energy in
plus that the concept of Information is most abstract on the same track with matter and
energy. It is a fundamental concept.
3.3 Validity of Information :-
Information validity is determined through a simple formula:
IV = ETC
R
Where:
IV = Information Validity
ETC = Energy, Time & Cost of searching
R = Relevance of Information
That is to say, information is valid if the energy lost, time spent and cost of retrieval equals
to its appropriateness or the usability. On the contrary if the sourcing variables are greater
than its usability the information is said to be invalid.
3.4 Cost and Value of Information :-
The objective of the information system is to attain an optimum point where the marginal
value of information equals marginal cost of providing that information.
It must be noted that an excess quantity of information with a relative high cost can result
in negative marginal value. The optimal level of information processing is attained where
the MCI equals MVI. That is, point ―A‖. Concerning the level of output, we can state that:

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1. if MVI > MCI, increase output
2. if MVI < MCI reduce output
3. if MVI = MCI, output is optimum
3.5 Characteristics of Information:-
The value of information is based on ten attributes as identified by (Imeremba, 2003)
which are listed as follows:-
1. Accessibility – the ease and speed with which an information output can be obtained.
2. Comprehensiveness – the completeness of the information content.
3. Accuracy – the degree of freedom from error of the information output.
4. Appropriateness – how well the information output relates to the user‘s request. The
information content must be relevant to the matter on hand.
5. Timeliness – it is related to a shorter elapsed time of cycle: input, processing and
reporting of output to the users. Normally, for information to be timely, the duration of
this cycle must be reduced.
6. Clarity – the degree an information output is free from ambiguity. Ambiguous terms
or equations should be avoided.
7. Flexibility – the adaptability of an information output not only to more than one
decision, but to more than one decision maker.
8. Verifiability – the ability of several users examining an information output and
arriving at the same conclusion.
9. Unbiasness – the absence of intent to alter or modify information in order to produce
conceived conclusion. In other words, it must be free from bias.
10. Quantifiable – the nature of information produced from a formal information
system.
3.6 Information Resources :-
The term ‗resource‘ means a source of supply, usually in large quantity. A person is
said to be ‗resourceful‘ when he or she is capable of handling difficult situations.
Generally, resources are aids to the researcher. They are those materials, strategies,
manipulations, apparatuses or consultations that help the researcher to enhance
research and development. Information resources therefore include all forms of
information carriers that can be used to promote and encourage effective research
activities and developmental projects.

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3.7 Information Storage and Retrieval :-
Information storage and retrieval are the operations performed by the hardware and
software used in indexing and storing a file of machine-readable records whenever a
user queries the system for information relevant to a specific topic. For records to be
retrieved, the search statement must be expressed in syntax executable by the computer.
According to Reitz, (2004).
3.8 Material Resources :-
Material resources are classified into tangible and intangible resources. Tangible
resources are visual aids, aural aids and audiovisual aids. Dike (1999) gives examples:
Visual aids – research materials and devices that appeal to the sense of sight and touch
such as books, journals, pamphlets, newsletters and reference sources that are in
printed format. They also include projected aids, pictorial aids, three-dimensional aids,
laboratory equipment, chemicals and apparatuses and non-projected aids.
Auditory aids – research materials that appeal to the senses of hearing and touch too
such as records and record players, tapes and tape recorders, language laboratories,
radio, etc.
Audiovisual aids – resources that appeal to the senses of sight, hearing and touch such
as sound film, filmstrip projector, television, video tape recorder and tapes, VCD, DVD,
etc.
Intangible resources – consist of methods and technique of research. It includes
methodologies, strategies or manipulations which the researcher uses in the laboratory
or at field work to effect or facilitate research and development (R&D); such as:
questioning, explanation, experimentation, exemplifying, sampling, modeling, designing,
construction, field trips, illustration, characterization, measurement, analysis of data,
monitoring, installation, computation, systems optimization, metallization, fabrication,
testing, blending, additive property studying, distillation, dissemination demonstration and
exhibition.
Uhegbu (2007) asserts that ―information utilization is the actual putting into appropriate
use of acquired information. Utilization of information differs from person to person and
from one corporate organization to the other according to their information needs and
other socio-economic imperatives. It can be viewed within the context of need, accessibility
and function performed. Alegbeleye (1987) posits that utilization of information by any
clientele is influenced by the kind of job done, profession or function one performs.
Neelamegham (1981) has identified accessibility as one of the prerequisites of
information utilization. Since there is growing concern in the need for equal access to
information, he argues that information generation, collection, organization, recording
and distribution, accessing and utilization operate imperfectly. Thus, the purpose, user
characteristics, environment or situation involved, medium of communication, quality,
infrastructural facility, cost and time of availability all condition the use of information.
Itoga (1992) identifies three basic categories of understanding in the context of
information utilization of a person:

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i. Perceptional understanding: In which provision and accessibility of information to a
user is anchored on the seeker‘s demand within the purview of his behaviour, gesture,
words and writing, etc.
ii. Normative or Objective understanding: In which provision and utilization of
information is viewed within the context of a user‘s objectives and purpose of seeking it.
iii. Contextual or subjective understanding: in which utilization of information is a
function of the subjective meaning given to it. Availability and accessibility of
information in whatever medium and quality is meaningless if it does not meet the
complex behaviour needs of the people be it economic, social, political, cultural and
technological. Need satisfaction becomes more understandable by the fact that
contemporary information users are becoming increasingly more complex and
sophisticated in their demand for survival. The efficacy of the principle of information
utilization therefore is anchored on its ability to satisfy the needs of seekers.
This principle of use based on four broad premises:
i. Goal – every use of data and information is goal-oriented. It must aim at solving a
problem or enhancing a better understanding of an already known situation. The
purpose of seeking information is central to its demand and use.
ii. Availability – entails not only that information is provided but its accessibility. It
must be accessible and devoid of socio-economic and environmental impediments.
iii. Process (channel of communication) – whatever medium is used, effective
information utilization is possible if the processes of accessibility are cheap,
unambiguous, relevant, nearer to people, and in line with their level of sophistication,
literacy and understanding.
iv. User satisfaction – the ultimate purpose of utilizing information is to satisfy the
seeker‘s need. Because user‘s needs are varied, their satisfaction amounts to a high level
achievement for them.
The diagram below demonstrates these elements and their interaction to enhance
utilization of information.
Goal Availability Communication Channel User Satisfaction
User User‘s Understanding Information Environment
User satisfaction is influenced by the means of accessing information. Without good
information communication channels, accessibility will be difficult and its utilization
impaired. Therefore effective channel of communication is paramount in the utilization
of information for user satisfaction. Below is a diagram showing the principles
(conditions) that govern information utilization by any information user.

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3.9 Return on Investment
Always in the forefront of special librarianship is the term ‗Return on Investment‘
(ROI). The concept provides a framework for establishing a value for the work,
services, and expertise of information professionals. It examines the resources (money,
time, personnel, etc.) committed to providing information services compared with the
value of the ultimate outcomes achieved by users of the information, using support from
those information services.
3.10 Information on the Internet
Information is available on the Internet; however, skills are required in order to be able
to gather information on the web. Apart from going directly to the URL, there are four
major ways to source for information on the web. There are search engines and meta-
search engines, information gateways, subject directories, directory portals, and online
databases (Aina, Mutula and Tiamiyu (2008).
Search engines are huge databases containing web page files that have been assembled
automatically by machine. There are two types: individual and meta-search. Individual
search engines compile their own searchable databases on the web. Examples are:
User Behaviour User Satisfaction
Understanding of himself and
the type of information he
requires. Actual appraisal of
his information situation
Goal identification: activities,
functions, responsibilities,
need evaluation and
understanding
Availability: relevance,
location, source credibility,
quantity, delivery, accuracy,
etc.
Ease of acquisition, cost,
time, labour
Information Environment
Process: information
communication channel:
books, documents,
telephone, oral, letters,
bulletins, etc.
Economic
Social
Political
Cultural
Education
Others

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(i) All the Web: http//alltheweb.com
(ii) Alta Vista:www.altavista.com
(iii)Google:www.google.com
Meta-searchers do no compile their own databases. Instead, they search the databases
of multiple sets of individual engines simultaneously. This could result in a multiple lists
or a single list. Multiple lists display search results in separate lists, as they are received
from each engine. Duplicate entries may appear. Single lists displays multiple-engine
search results in a single merged lists, from which duplicate entries have been removed.
Examples are:
(i) vivisimo: http://vivisimo.com
(ii) surfWax: http://surfwax.com
(iii)ixquick: http://www.ixquick.com
Searches engines and meta-search engines are good for precise searches, using named
people; or for organizations and for searching quickly; and widely topics that are
difficult to classify. They are not good for browsing through a subject area.
3.11 Information Gateways
There are two kinds of gateways: Library gateways and Subject directory/Portals.
Library gateways are collections of databases and informational sites, arranged by
subject that have been assembled, reviewed and recommended by specialists, usually
librarians. These gateway collections support researched and reference needs by
identifying and pointing to recommended, academically-oriented pages on the Web.
They include subject directories and virtual libraries gateways. Examples are:
 ELDIS the gateway to Development Information: http://www.eldis.org
 Development Gateway: http://www.developmentgateways.org
 WWW Virtual Library: http://www.vlib.org
 SOSIG (Social Science Information Gateway): http://www.sosig.ac.uk
 Ask ERIC (educational information): www.eduref.org
 SearchEdu (college & university sites): http://www.searchedu.com
3.12 Invisible Web
There is a large portion of the web that search engine spiders cannot, or may not, index.
It has been dubbed the ―Invisible Web‖ or the ―Deep Web‖, and includes, among other
things, password protected sites, documents behind firewalls, archived material, the
contents of certain databases, and information that is not static, but assembled

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dynamically in response to specific queries. Web profilers agree that the ―Invisible
Web‖, which is made up of thousands of documents and databases, accounts for 60 to
80 percent of existing web material. This is information one probably assumes one could
access by using standard search engines, but that is not always the case. According to
the Invisible Web Catalogue, these resources may or may not be visible to search engine
spiders, although today‘s search engines are getting better and better at finding and
indexing the contents of ―Invisible Web‖ pages.
In order to access so-called ―Invisible Web‖ sites, one needs to point one‘s browser
directly at them. That is what many library gateways and subject-specific databases do.
They are good sources for direct links to database information stored on the ―Invisible
Web‖. Examples are:
 University of Botswana Library: Medupe http://medupe.ub.bw
 University of Botswana online databases:
http://medupe.ub.bw/screens/databaselist.html, e.g. EBSCO host.
3.13 Subject Directories/Portals
Subject directories, unlike search engines, are created and maintained by human
editors, not electronic spiders or robots. The editors review and select sites for inclusion
in their directories on the basis of previously determined selection criteria. The
resources they list are usually annotated. Directories tend to be smaller that search
engine databases, typically indexing only the home page or top level pages of a site.
They may also have a search engine for searching their own directly (Chamberlain,
2006). Examples are:
(i) Excite: http://www.excite.com
(ii) Microsoft Network (MSN): http://www.msn.com
(iii)Netscape: http://www.netscape.com
(iv) Yahoo! http://www.yahoo.com
Information gateways are good for topics that fall into a thematic area that has a
subject directory for guided browsing in a subject area; they are not good for quickly
finding information on widely varying themes.
3.14 Perfect Information versus Imperfect Information
The assumption of perfect information corresponds to equilibrium models which describes
the mechanisms in a pure competition market. This means that assuming that all agents are
rational and have perfect information, they will choose the best products, and the market
will reward those who make the best products with higher sales. Perfect information would
practically mean that all consumers know all things, about all products, at all times
(including knowing the probabilistic outcome of all future events), and therefore always
make the best decision regarding purchase. According to the perfect information model a
competitive equilibrium is a situation in which: each individual, taking prices as fixed,
chooses the quantities of the different goods to produce and exchange, in order to obtain the
most preferred bundle in the budget set; equality between supply and demand holds, that is,
for each good, the sum of the quantities supplied is equal to the sum of the quantities

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demanded (Makowsky & Ostroy, 2001). All these conditions of general equilibrium theory
reveal the instantly availability, and free access of information. All economic agents are
perfect informed, having complete information. In reality, such equilibrium model is only
theoretical. The market economy is too complicated to be fully described in simple terms.
The economics of information is focused on their imperfections and on the fact that
information can change the behavior of consumers, households and firms (Huffman, 2009).
There are two essentially types of information - public and private information. Public, or
symmetric, information is available to everyone but it might be free, or more likely costly to
obtain. Private information, or asymmetric is information that is only privately known and
it may be under the control of informed and interested parties who may choose to use it
strategically (i.e., to increase their welfare relative to welfare of others).
The recognition that information is imperfect that obtaining information can be costly, and
those asymmetries of information exist has profound implications for potential of analysis
of a person or a firm. Early economics largely assumed that information is abundant or
perfect and in such a situation, the human being has an unlimited rationality. In other
words, there is a complete and absolute capacity for analysing. Simon (1982) is the first who
introduces the concept of bounded rationality, which limits the amount of information a
manager can comprehend about the firm‘s operation. He shows that in a complex situation,
the economic actor is looking to study all the possibilities in order to find a reasonable
solution in an uncertain situation. Usually, he will retain the first option that seems to be a
satisfactory solution.
Therefore, some aspects are derived from the economic model of imperfect competition.
Stiglitz (2000) states that under the standard paradigm of perfect information markets are
Pareto efficient, except when there one of a limited number of market failures occurs.
Under the imperfect information paradigm, markets are almost never Pareto efficient. This
means that information becomes a good that has cost and value. The economic actors follow
to maximize the utility of information by equaling its marginal cost with marginal utility.
3.15 Information as an Economic Good
Information goods are goods that can be expressed in a digital format. They are
sequences of 0s and 1s which affect economic outcomes (Shapiro & Varian 1999; Quah,
2003). As a product of market, information transfers its utility in time and space
through many forms of digital content. Entertainment, such as movies, music and
games, and also books, software and ideas are classical examples of information goods.
Considering the speed of technological progress, it is reasonable to assume that digital
goods continue to gain in importance. According to Gartner (2013), consumers spending
on digital goods and entertainment products and services will reach $2.7 trillion by
2016. This amounts to $130 billion annual growth in spending between 2012 and 2016.
As economic good, information seems to be a problematic concept for economic theory.
Some scholars consider that the distinctive nature of information as a good have leaded
to a series of externalities which obstruct its consideration as an economic good.
Nevertheless, information is something which can be transferred, has some utility, and
is capable of having a value attached to it. Therefore, despite its distinctive,
problematic, nature, information can be considered to be an economic good.
Information goods have distinct features which have an effect on economic outcomes

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and economic policy. Information goods are experience goods, they are non-rival and
can be non-excludable.
o Non rivalry property reveals that the consumption by one consumer does not prevent
other consumers from consuming it (Shapiro & Varian, 1999). Taking into
consideration the economic point of view, information can not be destroyed when used,
as conventional economic goods. For example, reading a book by one person does not
obstruct the others to read the same book. Unlike tangible goods where possession of a
good by one deprives another of the good, information can be possessed by many
without diminishing its quantity or quality (Shapiro & Varian, 1999). This property of
information good has a consequence for producers and consumers related to the
economic category of cost. The marginal costs of reproduction for information goods
are low. While production costs are typically high and fixed for information products,
these products can be copied cheaply (e.g. the master copy of a book, movie, or
soundtrack).
o Non-excludability property means that it is hard or impossible to exclude other
consumers from consuming the good: an often used example of non-excludable
information good is knowledge. Since a possessor of information can transfer it to
others without losing the information, the laws of supply and demand that depend on
the scarcity of products do not easily apply to many information goods.
At this point we have to make the following distinction: information non rivalry
property is related to the nature of information, while the non-excludability property is
conditioned by the legal and technological framework. The scholars in the economics of
information do not assume that all information goods are non-excludable. Jones (2002)
gives some examples of non-rivalrous information goods that are non-excludable (digital
music, computer games) and those that are excludable (e.g. encoded satellite TV
transmission). The non-excludability property of information introduced the problem of
―free-rider‖. This occurs when people do not pay the cost but still gets the benefit of an
information good or service.
o Information as experience good. Experience goods are goods whose quality or value is
revealed only when the good is consumed (Shapiro & Varian, 1999). For example, the
consumer doesn't know whether or not she will enjoy a movie or a live performance of
opera until she has seen the movie or experienced the performance. From the viewpoint
of social welfare, limited information can lead to suboptimal consumer choices and
decrease the incentives of companies to invest in quality, thus lowering social welfare
(Stiglitz, 2002).
o Information goods are infinitely expansible. Arbitrarily many copies of information
good can be manufactured at a low or zero cost. This property leads to an interesting
phenomenon, highlighted by Herbert Simon as ―a wealth of information creates a poverty
of attention” (Simon, 1997).
The economic properties of information have substantial importance in order to analyze
the particularities of cost and value of information goods.

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3.16 Cost and Value of Information
Information has become a commodity and is regarded as an important input in
production that can be measured. However, information has certain characteristics that
differentiate it as an economic good that suggest that the value and pricing of
information goods need special attention. Furthermore, the value of information plays a
fundamental role in the economy. An information economy is based upon the premise
that information has economic value and requires an information marketplace in which
such value can be exchanged (Branscomb, 1994). As noted above, information is a
distinctive good. Its unique features are evident even in typical cost considerations. The
production of information for distribution is characterized by a high fixed cost (the cost
of acquiring or developing the information in question) and an essentially zero variable
cost. A good example is given by Shapiro and Varian (1999), who state that cost of
production is dominated by the "first-copy costs." Once the first copy of a book has
been printed, the cost of printing another one is only a few dollars. This means that once
the first copy of the information has been produced, additional copies cost essentially
nothing. In economics terms, the fixed costs of production are large, but the variable
costs of reproduction are small. This zero variable costs reflect information's distinctive
characteristics of being essentially non-material and infinitely reproducible. A parallel
view on total production cost of a standard good and an information good is shown in
figure 1.
Total Production
cost Fixed cost
Non-information good Information good
*tends to zero
Figure 1. Total production cost – non-information good vs. information to zero
Source: Varian(1998)
The main statement that derives from the cost characteristics of information goods is
the following: information is costly to produce but cheap to reproduce. The atypical cost
structure of information goods in competitive markets result in their marginal cost.
Knowing that price is the quantity of payment for an economic good, competitive
markets drive prices of all economic goods towards the marginal cost. Information
goods tend to have high fixed costs but low marginal costs. This means that creating the
first copy is expensive but making a copy is relatively inexpensive (Ponelis, 2007). In
other words, producing the first copy of information good involves a large fixed cost F,
and a small marginal cost c. This has the consequence that free competition in the
market for information goods would lead to a market failure: If information goods
could be sold freely, their price would sink to the marginal cost of production (which is
zero in the case of the goods which are available on the Internet) and there would be no
incentives for paying the fixed cost F, and for producing information goods. Therefore,
another statement is derived: the marginal cost of producing for information good is
typically tend to zero due the fact that its multiplication is infinitely with low costs.
Variable cost*
Fixed cost
Variable cost
Fixed cost

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It should be note that there is a different approach of the marginal cost of acquiring
information. The marginal cost of acquiring additional information increases because
individuals may have to travel greater distances to check prices and services, and also,
the opportunity cost of their time increases as they spend more time acquiring
information. Thus, the marginal cost of information usually increases as more
information about a product is obtained. The marginal cost curve for additional
information slopes upward. Analyzing the marginal benefit it can be observed that it is
relatively large at first, but as more information is gathered, additional benefit
decreases. We are speaking about the optimal amount of information which is founded
where the marginal benefit of information just equals the marginal cost of information.
This level of information is identified as perfect information.
The above considerations lead to the following key-points (Shapiro & Varian, 1999):
o Information is costly to produce but cheap to reproduce.
o Once the first copy of an information good has been produced, most costs are sunk
and cannot be recovered.
o Multiple copies can be produced at roughly constant per-unit costs.
o There are no natural capacity limits for additional copies.
Another main issue is related to the value of information. The question of value in
information has been addressed from many perspectives. Considerable studies
(Krugman & Wells, 2008) are devoted to refer on informational goods that are products
whose values come not from their physical characteristics but from the information they
embody. Because replication and distribution costs for the copies after the original are
essentially zero online, the price of information goods is not based on cost but on the
value attached to the good by individual customers (Jordan, 2012).
The value of an information good, X, can then be expressed as the expected value to be
gained from the use of that information good, or expressed as :
Value of X = E[use(X)]
The use of expected value enables the analyst to treat the value of information goods as
fixed. According to (Bates, 1990), there is a degree of variability inherent in this
conceptualization of value in that the value of the information good X is still dependent
upon context and the differing tastes or preferences of the parties involved.
It can be note that the production and consumption of information goods are marked by
substantial externalities or impacts. For many information goods, there are positive
networks effects associated with the use of the good. Suppose there is only one person in
the world which has an e-mail address. An e-mail account derives its value only from
the fact that other people also possess e-mail accounts so that they can exchange
messages between them. The more people who have an e-mail account, the more
valuable an electronic messages interchange is. This phenomenon, in which a good‘s
value to an individual is greater when many other people own or use the same good, is

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common in technology-driven sectors of the economy. This is called a network
externality.
Positive network effects are present, if consumer's utility from a good depends on the
number of other consumers that use the good. Many information goods, such as social
media, software, payment innovations, games, mobile operating systems and even music
exhibit direct or indirect network effects. Internet business models are typically multi-
sided platforms. For multi-sided platforms, network effects are particularly important
(Rochet & Tirole, 2006).
When positive network effects are present, it is common that the size of the network
grows gradually until a critical mass is reached after which the market size suddenly
explodes. The nodes of an information network are network goods in this sense, since
their value increases with the size of the network. Communications technologies are a
prime example: telephones, e-mail, Internet access, fax machines, and modem all exhibit
network externalities. It is well known that network effects lead to demand side
economies of scale and positive feedback. The cost structure leads to substantial
economies of scale: the more you produce, the lower the average cost of production is.
In the same time, the principles of network effects have implications on market
dynamics that reflects in positive feedback of information. This means that as more
information is disseminated, the more value is gained by each user. According to
(Shapiro & Varian, 1999) positive feedback makes the strong get stronger and the weak
get weaker, leading to extreme outcomes. The usefulness of competing system offered by
Microsoft and Intel is derived from the great number of users, in contrast with the
Linux system which has a lower perception across the users.
Starting from these characteristics of information goods it can be concluded that:
 The value and the quality of information are uncertain. Value of information
good is based on the utility derived from the consumption of the good.
Consequently, the quality of information good is revealed during its
consumption.
 The cost of reproduction an information good is negligible. That way, the price
of information is reflected on its value, not on its cost.
 The certain characteristics that distinguish information good from other
economic goods give rise to the ―free-rider‖ problem. Consumers can take
advantage of public goods without contributing sufficiently to their creation.
Given the development in economies, information has become a commodity and as a
result the value of information is important. Information, however, has certain
characteristics that distinguish it from other economic products and services and which
lead to an atypical cost structure, namely that the marginal cost tends to zero. Since
competitive markets will drive prices toward marginal costs, the prices of information
goods tend to zero.

25. Page - 25 -
Furthermore, because of the nature of information leading to sub-optimal markets, the
value of, and therefore also ability to charge a price for, information must be protected,
which is enforced legally through intellectual property rights. These rights also serve to
stimulate and support the creation of information in societies and economies.
Information is clearly a peculiar economic good. Its distinctive nature and features have
contributed to its problematic treatment in economic theory. The challenges of
information market are addressed both producers and consumers of information goods.
3.17 The Librarian‘s View of Information
Librarians view themselves as information professionals. How do they view
information? In the past, librarians have busied themselves most with the
communication or transmittal stage of the information process. Others do the collecting
and organizing of information: writers, artists, and publishers, for example. Librarians
present this gathered content and make it available. While a librarian must be aware of
content, knowing what it is and where to find it, his or her chief concern is with the
presentation of content, not with its production.
At present librarians are keenly interested in the format in which information appears,
and with its means of presentation. Many library conferences and journal articles focus
on the characteristics of print versus electronic formats, or discuss commercial
enterprises such as content mediators that librarians fear may encroach on territory
they consider their own.
In the literature of library science there is much discussion of value-added information
services. Both librarians and their clients have become concerned about the glut of
information, asking how to eliminate needless and worthless data in the search for
appropriate content. For library users, there are very real barriers to accessing,
analyzing, and applying information, and librarians add value to information whenever
they reduce the barriers to it. Value is added in easing the finding of the most
appropriate, complete source of information, and in easing connections with
information. Value is also added in easing the analysis and processing of information,
and in facilitating its application. Consultants of all sorts know this well, and it is plain
to see how much value our society places on providing hand-holding and turn-key
solutions.
For all their concern with providing information access, giving good service to users,
and adding value, librarians are hampered by the fact that information cannot yet be
quantified and valued in any measurable way. Each element of information-handling
requires its own accounting: acquiring information, presenting information, analyzing
information, and so on. What is the relationship between the expense incurred in
collecting information and the value of that information? This is a troublesome question
for librarians. They must plan for the future, justifying increasing expenditures to their
funding agencies, in the absence of a meaningful scheme to measure the value of
information.

26. Page - 26 -
3.18 New Metaphors for Information
Stiglitz cites his 1976 and 1980 marketing studies done with Sanford J. Grossman.
These studies showed that ―if information is costly, there must be an equilibrium
amount of disequilibrium--persistent discrepancies between prices and ‗fundamental
values‘ that provide incentives for individuals to obtain information.‖ Stiglitz and
Grossman concluded that ―the only information that could be efficiently distributed was
costless information.‖
Does Stiglitz' reference to ―costless information‖ imply that it is neither necessary nor
possible to quantify information in terms of currency? Information is only one of many
nonphysical, non-material things we value. Do we need to measure it in dollar terms any
more than we need to measure satisfaction that way, or self-expression, or self-
fulfillment?
In the past, society‘s attempts to assign a dollar value to information and knowledge
have had very uneven results. In academic life, a scholar‘s reputation depends on the
perceived value of the knowledge she or he possesses. Society pays professionals such as
doctors and lawyers highly for their expertise. Yet the stereotype of the impoverished
artist or musician is based on a failure of the currency model when it comes to valuing
ideas. At what stage or level do ideas and information become truly valuable to us? Is
the satisfaction of merely possessing information sufficient in itself? Has the
information economy become so fundamental to business and to our way of life that we
must find a way to equate ideas with cash? Or, is an upheaval in our value system
implied here, a need for a new foundation for commerce? Librarians have long
recognized the interrelated nature of knowledge, the many ways in which information
produced in one discipline is integrated into another. Rather than finding analogies for
valuing information in the fields of business, economics and accounting, information
scientists could shape metaphors from other models. For example, information could be
compared with the processes of metabolism:
Information is always in circulation. It acts as the medium of exchange, the content of
exchange, and the valuing mechanism of the exchange.
Contradictions are evidence of being out of a stable state of equilibrium. They occur
when the circulation of information is blocked.
Information is disseminated, absorbed, and used in a way that can be likened to an
organism's use of nutrients.
Just as most chemical alterations occur at a cellular level, integration of information
can take place only as an individual phenomenon.
Information is integrated or comprehended at discrete levels, in a stepwise
progression, just as energy levels within the molecule progress from lower energy to
higher energy in discrete stages.
Information is an inherent property of structure. Some information is stabilizing
while some is destabilizing. Some destabilization is necessary to arrive at higher levels of
integration and complexity.

27. Page - 27 -
 Higher levels of information, meaning greater integration of information, bring
greater power, longer periods of stability, and wider vistas of understanding. Money is a
means of exchange, a way of measuring needs and wants, status and social expectations,
scarcity and satiety, quantity and quality, usefulness and satisfaction, and so forth.
However, the price system is an aggregate system. We cannot easily determine value at
the individual level. It is obvious that price is rarely equivalent to intrinsic value.
Perhaps value is, at root, a metaphysical construct. Is money the best surrogate for
value? Could information itself better represent value? Information is a larger and
more inclusive concept than money. Could information become the currency of a new
barter system, a true information economy?
Its development and use is more influenced by economic factors than the old media. And
the new media is more central to the new economy. Indeed, an ever more popular theme in
the scientific literature, government policy documents and the popular press, is that
technologically advanced economies are in the process of moving beyond industrial
capitalism to information-based economies. This transformation is expected to bring
profound changes in the form and structure of economic, social, cultural and political
systems. European Union integration is just one aspect of this restructuring of economies
and societies (see Bell 1973; Melody 1985; Soete 1997).
This transformation is being driven by the development and pervasive application of
information and communication technologies and services. The electronics, computer,
telecommunication, media and information content industries constitute a $US trillion
global industry sector. It is the fastest growing sector of the global economy and is
expected to remain so for the foreseeable future. Most national governments are
counting on these industries to provide the primary stimulus to their future economic
growth. If one were to believe the ―blue sky‖ speculation and industry promotion about
the technological and service possibilities in this field, one would quickly conclude the
new Information and Communication Technologies (ICT) will solve all of society‘s
problems. A more realistic assessment of the process of transformation to an
Information Economy may provide a little deeper understanding and help fashion more
realistic policies by governments, market decisions by industries, and education and
research decisions by universities. It can also help set the framework for comprehensive
research programs that can inform decision makers and enlighten scholars and students
(Melody 1996).
4.1 Brief history and definitions
Launched towards the end of the 1950‘s and early 1960‘s due to researches of Drucker
(1959/1994) and Machlup (1962), the concept focused mainly on the emergence of
innovative industries as well as on the impact they had on the economic changes.
However, the newly coined term proved to be difficult from the point of view of finding
a universally accepted definition (Bontis, 2004; Wood, 2003). When referring to a
knowledge economy, Druker (1998) depicts it as the appearance of knowledge
management and knowledge workers, in the detriment of the manual workers, or

28. Page - 28 -
another way round, the transition from ‗brawn to brain‘. Several economic forums and
institutions, and not only, manifested their interest in defining KE as well as trends that
this economy is characterized by.
OECD (1996) and APEC (2000) see it as very much bound up with the high skills/high
performance/high value added scenario, as a way for firms and countries to compete in
a globalized economy. Another view, found principally in the scientific and technical
community, tends to view knowledge economy narrowly as applying to knowledge-
intensive industries where knowledge itself is the core competence. The latter is
typically found in software, internet companies and the health care sectors (Bankes &
Builder, 1992; Bolisani & Bratianu, 2017; Bolisani & Oltramari, 2012).
The knowledge-based economy is defined by representatives of the Organization for
Economic Cooperation and Development (OECD, 1996) as ―economies which are
directly based on the production, distribution, and use of knowledge and information‖.
In the knowledge economy, people who possess, use and transfer knowledge are
important. That is why people, knowledge, and technology need to be concerted and
synergized to facilitate the enhancement of added value at the level of the organization,
local community and/or macroeconomic level. The theme of knowledge-based societies
has become extremely relevant in the debates on globalization but also in the activities
of the main international organizations. Increasing the awareness of its importance for
social and economic progress and the formation of such a society is a global priority
issue, globalization becoming another characteristic of the KE. It is about the
penetration of knowledge in all areas related to society and economy and a significant
change of mentality and attitude with appropriate projections at the level of all socio-
economic structures.
Often, as already acknowledged at the beginning of the paper, alongside the term
„knowledge-based economy‖, concepts such as the „knowledge-based society‖ or
„knowledge economy‖ are also used. In the papers of the World Science Forum,
organized by UNESCO and the International Science Council in November 2003 in
Budapest, the following definition was proposed: a society based on knowledge, - an
innovative society based on lifelong learning concept throughout life. It unites the
community of scientists, researchers, engineers and technicians, research networks, as
well as firms involved in the process of research and production of high-tech goods and
services. It forms a national innovation and production system, which is integrated into
international networks on production, distribution, use, and protection of knowledge.
Means of communication and information technologies available in such a society can
provide access to the humanities. Knowledge is used for individuals to enrich
opportunities in cultural and material terms, and for the construction of a sustainable
society (World Science Forum, 2003). Several characteristics of the knowledge economy
emerge from this ample definition. In brief: innovation / production / network /
distribution / technologies, all in relation with knowledge. Starting from this definition,
Chartrand (2006) insists on the importance of the dissemination of knowledge and
technology, an action requiring a very good comprehension of ―knowledge networks
and national innovation systems‖ (Chartrand, 2006, p.8). In this definition, three key
terms are brought to our attention: knowledge, networks, and innovation. Researches
on innovation identify knowledge within organizations as core aspects of effective
innovation (Cooke, De Laurentis, Tödtling & Trippl, 2007; Harris, 2011; Lundvall,
2010).

29. Page - 29 -
Another scholar Brinkley (2006) considers that KE ―is what you get when firms bring
together powerful computers and well-educated minds to create wealth‖. Therefore,
wealth can only be obtained, in KE through IT&C and skilled workers.
The UN experts add other features to the previously mentioned definitions:
competitiveness and economic growth (Huggins, Izushi, Prokop & Thompson, 2014).
Thus, the knowledge-based economy is an economy in which knowledge is created,
distributed and used to ensure economic growth and ensure the international
competitiveness of a country. At the same time, knowledge has beneficial effects spread
across all sectors and economic processes. This definition is completed by the Asia-
Pacific Economic Cooperation, which highlights the importance of the knowledge-based
economy, arguing that the production, distribution, and use of knowledge are the engine
of development and profit-making and the premise of employment in all areas of trade
(APEC, 2000). APEC (2000) considers as essential to the knowledge-based economy -
the need to be competitive in a world full of both economic and political changes. The
knowledge-based economy promotes innovation, initiative, entrepreneurship, and
dynamism, being the economy whose one production factor is knowledge (Skrodzka,
2016). Changing the paradigm of development, in the global economy, leads to an
unprecedented increase in the value of science and education for social progress. Given
the latest trends in the global development of the emerging countries of the market
economy, the most important is the focus on building a knowledge-based economy. This
means that the main priority should be to develop human skills, focusing on: education,
science, and vocational training. Only in this way is it possible to integrate into the rapid
processes of globalization. The knowledge economy also envisaged increasing the
intensity of new knowledge and increasing the globalization of economic activities.
Increasing the intensity of knowledge was in turn influenced by the ever-changing
information revolution and technological change. The knowledge-based economy has
transformed the business world by re-evaluating the role of innovation as a core process
of production, and as an important factor in business success.
The knowledge economy impacts the entire system, as Lüthi, Thierstein, and Bentlage
(2011) puts it: ‗‗the knowledge economy is that part of the economy in which highly
specialized knowledge and skills are strategically combined from different parts of the
value chain in order to create innovations and to sustain competitive advantage’’.
Romanian researchers have also been preoccupied with defining KE. Thus, Nicolescu
(2006) considers that the knowledge-based economy is characterized by the
transformation of the knowledge in base material, capital, products, production factors
essentials for the economy and through economic processes in which the generation,
selling, acquisition, learning, stocking, developing, splitting and protection of the
knowledge became predominant and decisive for the profit obtaining and for the
assurance of the economic sustainability on the long term.
4.2. Theoretical background
4.2.1. Information and knowledge as economic categories
Categories such as information and knowledge, as well as relationships between them,
have not yet been clearly defined in economics. Part of the economic analysis was based

30. Page - 30 -
on the assumption of the semantic identity of the categories of information and
knowledge, and the other part made clear distinction between them.
Machlup and Mansfield apply the concept of knowledge, they reject the differentiation
of categories of knowledge and information. They claim that information is either a
metaphor (in cybernetics) or does not carry any meaning, and true information can only
come from an informant – the person who communicates content (Machlup and
Mansfield, eds. 1984). The definition of knowledge proposed by Machlup (1962) is
characterized by a broad and downright simple recognition of the term, i.e. anything
that is known by somebody. ―Knowledge is both what we know and our state of
knowing it. Information as that which is being communicated becomes identical with
knowledge in the sense of that which is known‖ (Machlup, 1962). He identified five
types of knowledge – practical, intellectual, small-talk and pastime, spiritual and
―unwanted‖ (Machlup, 1962).
Hayek (1945) used the categories of ―information‖ and ―knowledge‖ interchangeably.
He argued that social knowledge ―[...] never exists in concentrated or integrated form
but solely is dispersed bits of incomplete and frequently contradictory knowledge which
all the separate individuals possess. For him the economic problem of society is a
problem of the utilization of knowledge not given to anyone in its totality‖ (Hayek, 1945,
p. 519). Thus, the possession of information (knowledge) or its lack determines the
boundary conditions in the decision making process.
Drucker (1968) focuses on knowledge which he defines as a systematic, purposeful and
organized information. Porat uses mainly the concept of information defined as the data
that have been organized and communicated. He claims that the information is not a
homogeneous good or service such as milk or iron one (1977). On the basis of the two
approaches presented above, the following conclusion can be formulated, that there is a
need to distinguish between conceptual knowledge and information in economics.
Information is a special kind of economic good whose value in use is to reduce
uncertainty and to fulfill the potential function of the primary resource in relation to
knowledge (Żelazny, 2011). Whereas knowledge is a derivative of information collated
with experience and context.
Not every piece of information is or may become knowledge, but all knowledge is (was)
information. Knowledge can be the input and/or the output, it is a unique economic
good, which should be reasonably managed. In the macroeconomic dimension these
issues are reflected in the concepts of knowledge economy, knowledge society and the
intellectual capital of countries. The mesoeconomic dimension concerns the so-called
knowledge sectors and industries, and the regions of knowledge. At the microeconomic
level there are identified organizations based on knowledge, learning organizations or
intelligent organizations, and the so-called prosumers. In case of information – which
may not always reflect the cognitive ability, the center of gravity lies in the management
of this asset in the process of making rational decisions of allocation by consumers,
businesses and a government. Due to the semantic difference in the conceptions of
knowledge and information – an alternative approach exists in the literature that
separates the two specific economics – economics of knowledge and economics of
information (Schumpeter 1942; Stigler 1961; Arrow 1962; Langlois 1985; Romer 1986;
Drucker 1993; Lundvall and Johnson 1994; Stiglitz 2000; Stiglitz 2002; Foray 2006).

31. Page - 31 -
The following issues are subject of studies in the economics of information – decision-
making process, imperfect information, asymmetry of information, uncertainty and
risk. The economics of knowledge examines the role of knowledge as an input (e.g.
competence) and/or the output (e.g. innovation) in the process of management. It is said
that even the whole economic theory relates to knowledge and information (OECD
2000).
4.2.2. Information society – knowledge society – information economy –
Knowledge economy
In chronological order, the term information society (joho shakai, johoka shakai in
Japanese) appeared in the early 1960s in Japan. The works of T. Umesao, Y. Hayashi,
Y. Masuda (1980) and K. Kohyama indicated the importance of information industries
(ectodermic, i.e. information, communication, education and culture), information
processing and information value of goods for the development of society. Earlier, back
in 1959, an American sociologist D. Bell used the term post-industrial society to denote
society which has passed from a goods producing stage to a service society (Bell 1973;
Rose 1991).
In such a society, a key place in the five-sector economic structure is occupied by sectors
related to education, health, communication and entertainment as well as banking and
insurance. The central importance of a socially accumulated theoretical knowledge as
well as researchers and professionals in the occupational structure have been identified.
In conclusion, the post-industrial society is characterized by:
– economic sector: the change from goods-producing to a service economy,
– occupational distribution: pre-eminence of the professional and technical class,
– axial principle: the centrality of theoretical knowledge as the source of innovation
and of policy formulation for the society,
– future orientation: the control of technology and technological assessment,
– decision-making: the creation of a new ―intellectual technology‖ (Bell 1973).
Interestingly, Bell (1973) explained the reasons that determined the choice of the term
post-industrial society rather than knowledge society, information society or
professional society.
The economic point of view on the role of knowledge in economic and social
development was presented by Machlup (1962). He studied economics under L. von
Mises and F. Hayek at the University of Vienna and introduced the concepts of
knowledge economy, knowledge industries and types of knowledge.
To Machlup ―[…] knowledge has always played a part in economic analysis, or at least
certain kinds of knowledge have. [...] But to most economists and for most problems of
economics the state of knowledge and its distribution in society are among the data
assumed as given‖. As a result of knowledge operationalization four elements were
indicated: education, research and development, communication and information.
According to Machlup producing knowledge will not only mean discovering, inventing,

32. Page - 32 -
designing and planning, but also disseminating and communicating (includes
distribution). The largest sector of the knowledge economy is concerned with
distribution of knowledge (Godin 2008). In the knowledge economy there are six types
of knowledge producers – transporter, transformer, processor, interpreter, analyzer
and original creator. They are covered by thirty specific groups of knowledge
industries.
To Machlup (1962): ―[…] now the growth of technical knowledge and the growth of
productivity that may result from it are certainly important factors in the analysis of
economic growth and other economic problems‖. While formulating policy issues for
communication and information as a component of knowledge he draws attention to
information technologies as a source of growth and productivity in information
economy. At the time, he mainly pointed at the improvement of decision-making process
and cost savings through the use of those technologies.
Changes taking place in technology, economic policy, industry structures, economic
theory, knowledge need to be governed and managed, and in economic issues they were
identified by Drucker (1968). He called them the age of discontinuity in world economy
and technology. Major discontinuities exist in four areas: new technologies, the world‘s
economy, society and knowledge. Among the four new industries important place is
occupied by the information industry based on computers. According to Ducker (1968):
―[...] the most important of the changes is the last one. Knowledge, during the last few
decades, has become the central capital, the cost center and the crucial resource of the
economy. This changes labor forces and work, teaching and learning, and the meaning
of knowledge and its politics‖. Knowledge is being applied to knowledge itself and it is
management revolution (Drucker 1993). As a result of these changes, it was found that
the U.S. has changed from an economy of goods into a knowledge economy. At the same
time Drucker notices that this does not simultaneously mean the creation of knowledge
society and at this stage uses the term post capitalist society (Drucker 1993). The
conception of information economy and an attempt to measure the information sector in
the U.S. economy presented M.U. Porat. In his opinion – ―If we are to make bold
statements about the U.S. as a post-industrial society or an information economy then it
is incumbent upon us to provide at least that summary statistics‖ (Porat 1977). His
research object was to identify the extent of the information activity (as opposed to
agriculture, industry or services) in the total U.S. economic activity. According to Porat
(1977): ―[…] the information activity includes all the resources consumed in producing,
processing and distributing information goods and services‖. He divided the
information into two major activity sorts, i.e. the primary information sector (where
information is exchanged as a commodity) and the secondary information sector (where
information is embedded in some other good or service and not explicitly exchanged)
(Porat 1977). After multivariate calculations it was found that the U.S. has emerged as
an information-based economy. At the same time, the special role of information
technologies was highlighted which ―invade‖ various sectors of the economy and cause
that the old arrangements may come into conflict with the new ones. Due to the
horizontal impact of information technologies on the overall economy, there is a need
for a redefinition of information policy. It is worth stressing that all of these conceptions
drew attention to the technological dimension associated with the management of
information and knowledge in economic and social aspects. Currently, it operates under
the name of information and communication technologies (ICT). The term ICT should
be understood as a set of technologies gathering, processing and transmitting

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information in electronic form. The components of ICT are teleinformatic
infrastructure (computer hardware, networks – including the Internet, telephone
hardware) and software (including e-products and e-services).
4.3. Research findings
4.3.1 Information society with or without the knowledge economy
Societies can be characterized and analyzed as complex systems within the framework
of general system theory (Soper at al. 2012) The society system consists of combination
of subsystems. Among them the most frequently pointed are – economic, political and
cultural subsystems (Leipold 1988; Soper at al. 2012). All of them should be examined
holistically as a whole of which all the parts are connected and react with each other.
The social system incorporates the economic system as a constituent part (Zafirovski
and Levine 1997). Economic order, regime, factors, processes and output can be
indicated in the economic subsystem. The political subsystem is featured by political
order, regime, culture and processes. The cultural subsystem is associated with the
cultural order, i.e. religion, customs, ethical and social standards, education system and
cultural processes (Leipold 1988). This arrangement of relationships is penetrated
horizontally with ICT, creating a network of interdependence previously absent.
A fundamental challenge is to investigate the relationships between the conception of
information society and knowledge economy. Today, there are attempts to define the
relationship, though with varying degrees of success. According to Roberts (2009): ―[...]
the term knowledge economy is used to describe the economic structure in the emerging
global information society in which the most amazing economic success depends on the
effective utilization of intangible assets such as knowledge, skills and innovative
potential”. In a similar manner, i.e. discussing the knowledge-based economy as an
element of information society proposes Becla (2012). A different point of view is
presented by Sharma, Ng, Dharmawirya and Lee (2008), according to whom knowledge
society is a part of knowledge economy.
Considering the presented standpoint and the previous studies of the author (Żelazny
2009) the following model of the relationships between conceptions of information
society, knowledge economy and knowledge society is proposed.
The information society is one in which the realization of the objectives by the citizens,
enterprises and public administration is more rational through the use of information
and ICT in economic, cultural and political dimensions. ICT radically change the way
of creation, acquisition, gathering, processing and transmission of information. The
main determinant of social change in the direction of IS is to increase the role of
information and expansion of ICT in all spheres of life. The development of IS and more
rational implementation of the objectives are determined by the awareness and the
ability to use information and ICT and access to information and ICT by citizens.
Among the most important factors affecting the development of IS may be mentioned:

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– appropriate level of awareness and competence of citizens not only in ICT, but also in
the use of information and transformation of information into knowledge in the process
of making allocative decisions,
– technical and economic availability of ICT,
– functioning of markets for information goods on which products and services, that can
take digital form, are traded (Varian, 1988).
It is difficult to identify the point at which a society can be regarded as information
society. In the literature, there are attempts to measure the level of development in
countries and regions on the basis of sets of indicators or composite indexes describing
areas important for the IS development. Among the most popular composite indicators
may be mentioned – the Networked Readiness Index (NRI) and the ICT Development
Index (IDI) (Ziemba and Żelazny 2013). Knowledge economy can develop under the
information society when business entities transform information into knowledge, which
becomes the most important input and output as well as a source of competitive
advantage. In practice, this is reflected in the conceptions of human capital (input) and
innovation (output).
A key element of this conception is the transition process of information into knowledge,
assigning knowledge the overarching role in relation to other factors of production and
identifying the relationship between knowledge and innovation. According to OECD
(1995): ―[...] At the heart of the old theory (neoclassical) is the production function,
which says the output of the economy depends on the amount of production factors
employed. It focuses on the traditional factors of labor, capital, materials and energy
[...]. The new growth theory, as developed by such economists as Romer, Grossman,
Helpman and Lipsey, adds the knowledge base as another factor of production‖. Truly
exogenous approach to the analysis of the role of knowledge (specifically TFP – total
factor productivity) in economic growth has been replaced by an endogenous approach.
In such case, the knowledge capital embodied in labor (human capital), in fixed assets
(material capital) and related to the general level of knowledge (not embodied, i.e.
licenses, patents, dissertations and scientific articles) is examined.
This approach to measuring the role of knowledge in economic growth, which has been
developing since the R. Solow, is called growth accounting. The knowledge capital is a
resource, the size of which is determined by the streams – investments in knowledge, i.e.
spending on research and development (R&D), expenditure on education and
expenditure on software. Knowledge is a derivative of information, in turn, innovation
is a derivative of knowledge. The conception of innovation has emerged in economics
thanks to J. Schumpeter, although currently a slightly different approach is most often
cited. According to Oslo Manual (OECD and Eurostat, 2005), ―An inno vation is
the implementation of a new or significantly improved product (good or service), or
process, a new marketing method, or a new organizational method in business practices,
workplace organization or external relations‖. David and Foray (1995) note that, ―[…]
an efficient system of distribution and access to knowledge is a sine qua non condition
for increasing the amount of innovative opportunities. Knowledge distribution is the
crucial issue‖. Innovations, being a practical reflection of the use of the accumulated

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body of knowledge (not necessarily scientific) are, therefore, a major determinant of
economic transition towards a knowledge economy. A special role in the trajectory of
information – knowledge – innovation play ICT. The justification is presented below:
− the use of ICT not only allows for fast and cheap access to the enormous existing body
of knowledge (including the so-called ―network‖ knowledge), but also, and perhaps
primarily, facilitates work on innovative solutions, which consequently contributes to
reverse enlarging of knowledge stock, and thus higher values of total factor productivity
variable (TFP);
− the use of ICT necessitates ongoing education, which implies an increase in the quality
of human capital and a positive effect on labor productivity;
− the introduction of information and communication technologies stimulates changes
in methods of conducting business activity aiming at the improvement of invested
capital productivity;
− the experience of previous inventions and potential of ICT suggests that previously
functioning solutions and the areas in which these technologies are applied in any case,
do not form a closed list, and more should be expected, bringing pro-productive effects.
As it is known, the economic subsystem is a component of the social system. The process
of shaping the knowledge economy would not have been possible without the primary
resource – information. Thus, the knowledge economy is part of the information society.
Identifying industries, sectors or knowledge economy means that citizens involved in
them are also creators of IS. Theoretically, it is possible that under the conditions of the
information society the knowledge economy will not come into existence. In this case,
the use of information and ICT will improve the rationality of action, but there is no a
distribution phase of knowledge and innovation underpinning the economic and social
development.
As in the case of IS, the attempts to measure the degree of KE development are taken in
two ways. There are proposed sets of indicators characterizing KE in a
multidimensional manner or developed composite indexes. The most popular examples
of the latter are the Knowledge Economy Index (KEI) and the Summary Innovation
Index (SII).
In the knowledge society (KS) citizens, regardless of performed social roles and age,
transform information into knowledge to produce new knowledge. In the knowledge
society an individual knows how to turn information into knowledge. Permanent
learning processes and a high level of innovation are essential features of such a society.
In this case, in each subsystem huge changes have occurred that enable production,
acquisition, distribution, sharing and use of knowledge. According to Sharma, Ng,
Dharmawirya and Lee (2008), ―Societies have for some time organized themselves in
order to achieve a healthy environment of knowledge development, learning and
sharing. Knowledge society has structures and cultures that facilitate frictionless

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knowledge diffusion and sharing and it's a sustainable learning community with an
emphasis on innovation‖.
In the context of this discussion, knowledge society is the most advanced stage of a social
and economic development. It is associated with the presence of essential qualitative
changes in all the areas of social, economic, political life, science and technological
progress, and interaction with nature (Melnikas 2012). A key role in this society will
play knowledge sharing. The intensity of this process not solely depends on human
capital and ICT. It requires the presence of additional factors, which together with the
human capital make up the intellectual capital (IC).
There is no one commonly accepted definition of IC in the literature. At the
macroeconomic level – of individual nations, according to Bontis (2004), ―The
intellectual capital of a nation includes the hidden values of individuals, enterprises,
institutions, communities and regions that are the current and potential sources for
wealth creation‖. By modifying Edvinsson‘s and Malone‘s microeconomic approach to
IC he proposed IC consisting of human capital and structural capital. The structural
capital consists of market capital and organizational capital, and the organizational
capital consists of renewal capital and process capital (Bontis 2004). A few years later
the national IC, which uses the following IC components, was measured – human
capital, market capital, process capital and renewal capital (Lin and Edvinsson 2008, p.
529). The human capital was defined as the knowledge, education and competencies of
individuals in realizing national goals (Bontis, 2004). The market capital is defined as
the IC embedded in national intra-relationships. It‘s a peculiar social intelligence that is
determined by social networks and institutions, and it means something more than just
a social capital (Bontis 2004). According to Lin and Edvinsson (2008), ―[...] it represents
a country‘s capabilities and successes in providing an attractive, competitive incentives
in order to meet the needs of its international clients‖. The market capital is sometimes
called relational capital (but in this case a social capital is distinguished). The non-
human sources of knowledge in a nation (i.e. infrastructure of national system of
innovation, including ICT) are comprised by the process capital. The last but not least –
the renewal capital is defined as a capability and actual investments in innovation that
sustain a nation's competitive advantage (Lin and Edvinsson 2008).
In the IC studies of Poland it was assumed that the IC consists of human capital, social
capital, structural capital and relational capital (The Report... 2008). The human capital
is directly related to the competences of citizens (knowledge, skills, experience). The
social capital refers to the trust, norms of reciprocity and networks of civic involvement,
collaboration skills. The structural capital infrastructure is characterized by the
national system of education and innovation, including ICT infrastructure. The
structural capital represents institutionalized knowledge (Seleim and Bontis 2013). The
relational capital is associated with the image of the country and its relations with the
environment, its attractiveness on the global market.
In summary, it can be stated that there is a significant convergence between the
conceptions in question of knowledge society and the intellectual capital of a nation.

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4.4 The Information Economy
4.4.1 Information as Bottleneck for Economic Transactions
On historical accounts, both consumer wants1 and businesses offers expand, and this
powers economic growth. Consumers and businesses seek each other in the market,
either on their own or are helped by various third parties to find better matching.
Whereas mainstream economics bypasses the information problem in its supply
demand law, our theory will focus on how consumers and businesses find each other,
and how they tackle the information deficiency problem. It will be shown that when
more wants and offers are found and matched, still more will be created.
As consumers become overwhelmed by the ever more complex world around them it is
unrealistic to expect them to increase their information by even more diligence.
Significant improvement actually comes from information institutions that enable
individual consumers to be better informed. As discussed below, the most effective
information institutions can empower consumers by collecting and organising scattered
information that isolated consumers already possess, and can achieve information
improvement by sharing and channeling information to the right person in the right
context.
The new theory goes beyond the mainstream supply-demand law by considering a
cognitive gray area. If consumers become better informed, more of their potential wants
and the offers of business can be revealed and matched. Our postulate is that, besides
the actual transactions, there must be an inexhaustible pool of potential wants and
offers that can be gradually revealed and satisfied as information continuously
improves.
Our main thesis is that information improvement will power economic growth without
limit over time. The enhanced transactions in general will benefit both consumers and
businesses, and we can speak of a magic pie of wealth that would be created as if out of
the thin air. The concept of a ‗magic pie‘ implies that economic transactions should not
be zero-sum-games, and economic problems should not be treated as optimisation under
constraints.
4.4.2 The Gray Cognitive Zone
The focus is now on defining the gray cognitive zone. First we note that information is
very unevenly distributed among people, with everyone knowing some things better
than other people. A single individual can also have their own personal gray zone, since
personal knowledge can be both explicit and implicit and the latter far outweighs the
former. It is not surprising that businesses won‘t share information fully with
consumers and present only a selective view of their products. Among consumers, the
available but unevenly distributed knowledge is an inexhaustible resource for their
information improvement. When you and I know something well, sharing it is an
obvious way to enhance our information coverage. This will be called the Information
Division of Labor (IDOL). It can be identified as the main mechanism to empower
consumers to be better informed. There are various reasons why consumers share
information among themselves. Firstly they have idiosyncratic motives beyond pure
economic calculation—people volunteering cooperation and giving each other tips can

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be motivated by noneconomic incentives, and yet the people power of IDOL can have
huge economic consequences. Secondly the harder consumers scrutinise businesses, the
more businesses can improve their offers. In fact it is much easier for businesses to
expand the variety and quality of their offers than it is for consumers to change their
needs or wants, an asymmetry discussed in details below. Therefore while the interests
of businesses and consumers are at best partially aligned, consumers see themselves
more as fellow taste mates than competitors. Businesses have hidden information that
they may never expose to the outside world, but the effects can manifest nonetheless.
Each firm has its own resourcefulness known only to itself, but upon external selection
pressure, it may tap into its hidden depth to make its offers more competitive in quality
and/or price. Such depth is uneven across businesses, with more innovative and efficient
firms better able to survive the competition and dominate.
The second type of cognitive gray zone is implicit knowledge within a single person,
which is particularly relevant for expanding consumer wants. People know much more
about their desires than they can explicitly articulate. Polany [7] studied implicit
knowledge more than half century ago, and many marketing business models actually
deal with implicit knowledge using a variety of refined tools. Implicit knowledge is by
definition the knowledge you have but cannot easily recall. Although we cannot
explicitly recall all our own preferences, what is implicit may become explicit on
suitable stimulus and contexts. In fact many marketing strategies aim to convert
selectively our implicit needs into commercial transactions.
4.4.3 Information Institutions
Individual consumers cannot cope well with ever more numerous and complex business
offers; they are hard pressed to compare products and determine their quality and
suitability. In fact there are many information institutions that we shall call
matchmakers who help consumers and/or businesses to find suitable matches.
IDOL is an important mechanism that enables consumers to be better informed, but it
is only when combined with matchmakers that IDOL can realise its full potential. Take
tripadvisor.com as example. Its evaluations of hotels and restaurants are by consumers
themselves, but the matchmaker‘s role is vital in connecting millions of travellers to
these evaluators as if they were the quality inspectors from a powerful quality control
agency.
Many more matchmakers empower consumers. Online auctions site like eBay lets
buyers and sellers rate each other, and their reputation systems keep people relatively
honest and trusting when they buy things sight unseen. Amazon lets its customers rate
books and countless other products, and the experience and expertise of a small
minority of insiders can enlighten millions consumers. Information institutions can
apply the latest advances in big data science to recommend relevant items to consumers
by figuring out the implications of networks implicit in the data. In fact online
matchmakers will be able to leverage IDOL, reputation, and recommendation to
empower consumers much further in the future. Matchmaking institutions play a
central role in modern markets, often one that is not conspicuous. We find most
products and services on our own, or so it may seem.

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There are many institutions that enhance consumer‘s search and evaluation
capabilities, while helping businesses to target advertisements. Matchmaking
institutions enjoy an obvious advantage: a given product will be repeatedly scrutinised
many times by many different consumers, allowing a potential customer to benefit from
this rich information by studying only it once. Therefore matchmaking institutions can
be very efficient in overcoming the information deficiency problem. However, as will be
seen, they are not necessarily neutral arbiters sitting between consumers and
businesses; often they choose to help one side more than the other, and they have much
leeway in doing so. For a better understanding the dilemma of who to favour in
providing help, we look to a well known mathematical model for insight.
4.4.4 The Fundamental Asymmetry
Above it was emphasised that our theory differs in a crucial way from mainstream
economics. Instead of maximizing under fixed constraints, we consider changeable
constraints. As has been argued, consumer wants and business offers are constraints
that can be expanded. In this section we posit that while constraints on both sides can be
shifted, it is much easier to shift the constraints of the business side. We call this the
fundamental asymmetry that underlies any dynamic theory of markets.
When pressed, businesses have more opportunities to revise their offers than consumers
can expand their wants, even though in principle the latter are also boundless on
historical accounts. The asymmetry manifests itself in the ease, scope, and speed of
constraint-shifting.
Consider how each side can shift the constraints. Upon increased consumer selection
pressure aided by information institutions, businesses are forced to revise their offers.
In the short term they will cut prices and/or improve quality of their products. In the
long term they must find new and more efficient ways to produce their current
products, as well as look for new products anticipating consumer demand, thereby
diversifying their offers. Here, direct pressure actually comes from the competition,
which is only effective when empowered consumers exercise enough discerning
capabilities. Therefore the ultimate driving force that obliges businesses to dig into their
reserves comes from consumers.
Consider see how consumers‘ wants can be expanded. Since each person‘s income is
limited (though people‘s income may increase with expanding business offers, in a
growing economy both sides expand commensurately), his or her wants can expand
slowly. There is also the factor that the price of consumer products typically drops
between their inception and maturity. Hence even with a fixed budget a consumer‘s
wants may change. Businesses try hard to obtain consumer intelligence but they achieve
only limited results. The difficulties stem from the following facts. While businesses and
their products are public information, consumers‘ preferences are private, so businesses
and their marketing agencies can only get a glimpse on what consumers really desire.
Secondly consumers‘ wants may be implicit or hidden, i.e. even when they are willing to
express them, they can only articulate a tiny fraction of their potential wants. Thirdly,
businesses don‘t have sufficient incentive to know individual consumers as their wants
are seldom or never repeated. Hence once a want is met it is saturated and it is of no
further interest to the vendor. In other words it‘s much easier to know a business offer
that is relatively stable than to know a consumer‘s needs which may recur infrequently,