1. A passage I found interesting was the discussion about how price dispersion can persist even when information costs are low. Even though the internet has made product comparison easier, the information is still not free because of the difficulty involved in observing quality. Therefore, consumers are willing to pay more money for a recognizable brand name, the assurance of quick delivery as well as safe online payment. The passage also showed the problems with the inability to judge quality in low-income/developing countries. In India for instance, the inability to judge the butterfat content led Indians to stop buying milk as consumption dropped 25%.It was not until the government introduced inexpensive machines to measure butterfat content of the milk at each stage of production that quality could be guaranteed. Nevertheless, this example of the milk in India is very different from quality over the internet. At least the internet provides consumers with some basis/standards for quality making the purchase decision easier even if it is more expensive. However, being completely unable to decipher product quality is incredibly frustrating and disconcerting. It reinforces how lucky we are as American consumers, despite problems we may have to deal with our economy.
2. Transaction costs represent the costs incurred in an economic exchange,not including the money price. The article talks about search costs and their importance in the market place. In the case of search costs, information is not free; if consumers want to find competitively priced products and find the best deal, they have to pay the merchant a few. However, the author explains that “it does not pay to search.”
The text states: “If you incur a search cost of 10 cents or more for each merchant you sample, and there are fifty sellers offering the urn, then even if you know there is someone out there who is willing to sell it at cost, so you save $5, it does not pay you to look for him. You would be looking for a needle in a haystack. If you visited one more seller, you would have a chance of one in fifty of that seller being the price-cutter, so the return on average from that extra price quote would be 10 cents, which is the same as your cost of getting on more quote” (43).
In other words, transaction costs can also represent the cost of your time researching/comparing prices as well as transportation costs in pursuit of market price knowledge.
3. Effects that arise from imperfect information include search costs (time, effort and money spend learning what is available where for how much) and evaluation costs (difficulties buyers have in assessing quality). Search costs ultimately weaken the force of competition; while product choice may exist, with imperfect information buyers are not able to easily compare prices and thus buyers can charge high monopoly-type prices. Another effect is the lack of mutually beneficial exchange. In both of these situations the consumer suffers; they are forced to pay high prices for products and/or have to deal with high search costs to even become informed, but will most likely then end up paying even more money for all of the product information then compared to just paying the high price in the first place.
However, another interesting effect of imperfect information is the entrepreneurial flourishing of “middlemen” like distributors and realtors. When search costs are involved in can prove more economical for consumers or businesses to hire someone else to find out the information for them. With this information in hand buyers can make better, more informed decisions while the middleman benefits monetarily for his service. However, this can also cause problems for sellers as lower search costs may result in the disproportionate lowering of price.
No comments:
Post a Comment