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
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