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Lecture 23 - Econ 201 Lecture 23 Information and Search...

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Econ 201 Lecture 23 Information and Search Example 23.1 . Suppose you want a new tennis racquet, but aren't sure which brand & model to buy. Dick’s has a large selection, so you go there and ask a salesperson for advice. After some discussion about your experience and style of play, the salesperson recommends the "Prince Thunder O 3 Silver," and you buy it for $300. Then a friend tells you could have bought the same racquet online for only $260. How do you feel about having spent $300? 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? 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. Fair Trade laws, which prohibited resale price maintenance, made it impossible for manufacturers to guarantee availability of high-service retailers. 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. Example 23.2 . 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? Suppose you visit the first store and find that they charge $50. Should you buy or continue searching? To search further is costly. What are the expected benefits? If you think $50 is already near the low end of the price distribution, then you don't stand to gain much. But additional search will be more attractive if you think $50 is near the high end of the distribution. Based on your estimate of the distribution of available prices and the cost of search, you should choose an "acceptance price." Then keep searching until you find a calculator priced at least that low.
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