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lecture21 - Economics 103 Lecture 21 Economic Organization...

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Economics 103 Lecture # 21 Economic Organization: Contracts and Markets
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Market Enforced Product Quality How do you know, when you buy a That it’s actually going to be a Snickers bar … and a good one? If it was bad, would you take the company to “Your worship …
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The problem is, if we’re not willing to punish a firm for cheating us, then they will cheat us all the time. - but that means all we’ll get is bad quality. It is like buying a used car on the side of the road. You know you get junk. So how can a market solve this problem?
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Suppose we have a firm that can sell HIGH quality or LOW quality. Suppose the consumer can only tell the difference once he gets home. Suppose HIGH quality costs more to produce. Suppose firms are price takers. Suppose that if a firm rips you off, you tell all your friends, and by tomorrow no one in the entire world will ever buy from the firm again.
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We would have a situation as follows: Clearly, the dominant strategy for the firm is to rip you off.
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