THE JOURNAL OF POLITICAL ECONOMYTHE ECONOMICS OF INFORMATION

George J. Stigler

BACKDROP Information is a valuable resource Mostly it is ignored Information producing industry ‘Advertising’

is treated with hostility Important problem of information –

ascertainment of market price

NATURE OF SEARCH Prices change frequently and no one will know all

prices that seller will quote at given time Buyer who wants to know must canvass various

sellers Lot of dispersion in price of the sellers Price dispersion-ignorance in market But not all products are completely homogeneous

NATURE OF SEARCH But its metaphysical and fruitless to say that

all dispersion is due to heterogeneity Buyer content with price if he wants to buy

from first seller only If dispersion is high (relative to cost of

search) then he will canvass several sellers The cost of search proportionate to number of

sellers identified

NATURE OF SEARCH The cost not equal to all consumers- eg- time

more important for people with higher income- optimum value found

Sellers can also search- optimum value With unique goods efficiency of personal

search is low Cost of search higher in case of powerful

inducement of local transactions

NATURE OF SEARCH Advertisement is important tool to identify

buyers and sellers Classifieds drastically reduces cost of search But its expensive especially incase of goods

that have few potential buyers Situation where traders chief service is to

provide meeting place for buyers and sellers

DETERMINANTS OF SEARCH Correlation between time and price Goodwill defined as continued patronage of buyers

without continued search Tourists pay more for product because of lack of

information Dispersion is a function of average amount of search

and which is a function of nature of commodity Concept of pooling

SOURCES OF DISPERSION Knowledge becomes obsolete Prices and demand change over time Sellers cannot maintain perfect correlation because

of cost of search Component of ignorance due to changing identity of

buyers and sellers New buyers and sellers Size of market Monopolic source of information

ADVERTISING Method of providing potential buyers with

knowledge of identity of sellers Tool for eliminating ignorance Advertisement to identify sellers, identify

buyers, and price Seller pays for advertisement because buyer

does not have preference for all advertisements Should buyers buy advertisement?

Cannot inform about every change in price The cost of search is a cost of purchase, the

consumption therefore will be smaller, the greater the dispersion of prices and greater optimum amount of search

CONCLUSIONS The identification of seller and price is just a

part of search of information Useful in profits, investment, quality of goods

etc Reputation demands price because it

economizes on search Ignorance is like winter- information will

prevent you from cold winds