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chapter 12 - Ka-fu Wong Uni ver si ty of H ong Kong 1...

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1 Ka-fu Wong University of Hong Kong The Economics of Information
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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.
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3 Example 13.1 . Searching for a racquet Suppose you want a new tennis racquet, but aren't sure  which brand & model to buy.
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4 Example 13.1 . Searching for a racquet Dick’s has a large selection, so you go there and ask a  salesperson for advice.  
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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.
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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?
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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.
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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.
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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?
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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?
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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.  
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12 Example 13.2 .
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