Chapter 12 - 1 Ka-fu Wong University of Hong Kong The Economics of Information 2 Invisible hand theory and information The invisible hand theory

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Unformatted text preview: 1 Ka-fu Wong University of Hong Kong The Economics of Information 2 Invisible hand theory and information The invisible hand theory assumes that buyers are fully informed. Given that consumers are not fully informed, they must employ strategies for gathering information. 3 Example 13.1 . Searching for a racquet Suppose you want a new tennis racquet, but aren't sure which brand & model to buy. 4 Example 13.1 . Searching for a racquet Dick’s has a large selection, so you go there and ask a salesperson for advice. 5 Example 13.1 . Searching for a racquet After some discussion about your experience and style of play, the salesperson recommends the "Prince Thunder O 3 Silver." You buy the O 3 Silver for $300. Then a friend tells you could have bought the same racquet online for only $260. 6 Example 13.1 . Searching for a racquet How do you feel about having spent $300 (instead of $260)? How do the costs of the two suppliers differ? How do the services they provide differ? Were the extra services you got at Dick’s worth it? 7 The free-rider problem and "fair trade" laws: Manufacturers may want to maintain minimum resale prices so that their retailers can earn enough to provide good service. Without resale price maintenance, consumers can shop at a full service store for information, then order online. Laws, which prohibited resale price maintenance (such as Fair Trade laws in the US), made it impossible for manufacturers to guarantee availability of high-service retailers. 8 Optimal Investment in Acquiring Information Keep acquiring more information until the expected marginal benefit equals the marginal cost. $/unit Marginal cost of Information Marginal Benefit of Information Units of Information I* I* = the optimal quantity of information. 9 Example 13.2 . You know that different stores charge different prices for the particular HP calculator you have decided to buy. Should you buy from the first store you visit, or should you search all the stores in your area? 10 Example 13.2 . Suppose you visit the first store and find that they charge $500. Should you buy or continue searching? To search further is costly. What are the expected benefits? 11 Example 13.2 . Suppose you have a good idea of the price distribution. 500 If you think $500 is already near the low end of the price distribution, then you don't stand to gain much from additional information. 12 Example 13.2 ....
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This note was uploaded on 11/07/2010 for the course ECONOMICS ECON1001 taught by Professor Prof during the Spring '10 term at HKU.

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Chapter 12 - 1 Ka-fu Wong University of Hong Kong The Economics of Information 2 Invisible hand theory and information The invisible hand theory

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