This chapter introduces the model’s two key pieces—the aggregate-demand curve and the aggregatesupply curve. After getting a sense of the overall structure of the model in this chapter, we examine the pieces of the model in more detail in the next two chapters. | Chapter 11 The Economics of Information McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Explain how middlemen add value to market transactions Use the concept of rational search to find the optimal amount of information market participants should obtain Define asymmetric information and describe how it leads to the lemons problem Discuss how advertising, conspicuous consumption, statistical discrimination, and other devices are responses to asymmetric information Information and the Invisible Hand All parties have all relevant information Without free information, market results are not efficient Bargaining for a bowl in Kashmir Parties must decide how much information to gather Information gathering strategies differ How The Middleman Adds Value Buyers sometimes choose among several version of a product Each has complex feature sets Research options Company web site Ask friends and family Consumer Reports, online product reviews Visit stores, ecommerce sites Consumer Choice: Buying DSLR Camera Best Denki recommends US$1,200 Nikon D7100 DSLR camera Sales rep seems knowledgeable Your next move is Thank them and do more research Trust the sales rep and buy them Go home and buy at the best price online ($950) Evaluate the importance of Immediate possession Best price Post-sales service and support The Value of the Middleman Sales representatives supply information to buyers Manufacturers can offer direct sales to bypass middlemen Information makes markets more efficient Purchasing the bowl in Kashmir Selling Babe Ruth Koh wants to sell a Win the War stamp. His reservation price is $300 An ad in the local newspaper cost $5 eBay cost is 5% of the Internet auction price The maximum price in the local market is $400 Two eBay shoppers have secret reservation prices of $800 and $900, respectively Selling Win the War stamp Benefits of eBay Card sells for $800 on eBay less $40 commission Ellis nets $760, $460 above | Chapter 11 The Economics of Information McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Explain how middlemen add value to market transactions Use the concept of rational search to find the optimal amount of information market participants should obtain Define asymmetric information and describe how it leads to the lemons problem Discuss how advertising, conspicuous consumption, statistical discrimination, and other devices are responses to asymmetric information Information and the Invisible Hand All parties have all relevant information Without free information, market results are not efficient Bargaining for a bowl in Kashmir Parties must decide how much information to gather Information gathering strategies differ How The Middleman Adds Value Buyers sometimes choose among several version of a product Each has complex feature sets Research options Company web site Ask friends and family Consumer Reports, online product .
