1. Limited Information
May 6, 2013

2. How was the exam?
A. Easy
B. Just Right
C. Hard / Fair
D. Too Hard / Not Fair

3. What was most useful?
A. Practice exams
B. Homework assignments
C. Class notes
D. Not one more than others

4. What was least useful?
A. Practice exams
B. Homework assignments
C. Class notes
D. Not one more than others

5. Announcements
• TAs are still grading exams
– We’ll let you know when they’re ready and how to
see your score.
• Two homework assignments now posted.
– Ch 12 (material covered this week in class) due
this Friday, May 10
– Ch 13 (material covered next week in class) due
this Monday, May 13

6. Last Class
• Finished our discussion of externalities
• Key understanding: How efficiency can be
restored when externality causes inefficiency
• Restoring efficiency was also underlying
motivation when studying
– market power
– games
• Recall: ``efficiency’’ = perfect competition
outcome

7. Perfectly competitive markets
• Firms have no influence over what the going
price in the market is.
– ``Price-takers.’’
• Characteristic of perfectly competitive
markets:
– All firms sell the same (really the same!) product.
– There are many buyers and sellers.
– There are no costly barriers to starting a business.
– Both consumers and firms are well-informed.

8. Perfectly competitive markets
• Firms have no influence over what the going
price in the market is.
– ``Price-takers.’’
• Characteristic of perfectly competitive
markets:
– All firms sell the same (really the same!) product.
– There are many buyers and sellers.
– There are no costly barriers to starting a business.
– Both consumers and firms are well-informed.

9. Learning Goals for Today
• Be able to list many markets where consumers
have limited information
• Same for producers
• Explain the sources of the free-rider problem
in this context.

10. What is ``Incomplete Information?’’
• First, what is the worth of ``complete
information’’ to the consumer?
– Consumers can make rational decisions about
marginal benefits (the demand line!)
• How about to the producer?
– Producers can make rational decisions about
marginal costs (the supply line!)

11. How much are you willing to pay for a
small cup of coffee?
A. $0-0.50
B. $0.50-1
C. $1-1.50
D. $1.50-2
E. $2+

12. Here you go.
A. $0-0.50
B. $0.50-1
C. $1-1.50
D. $1.50-2
E. $2+

13. Asymmetric Info
How small is ``small?’’
Consider the opposite if
you were a seller: how large
is ``small’’?

14. Markets with Incomplete Information
Consumers Producers
Spend a minute and try to think of some /
write some down.

15. In which consumer market is
information most valuable?
Consumers Producers

16. In which producer market is
information most valuable?
Consumers Producers

17. Lemons
• Cars, or other consumer items, that have
hidden problems are known as “lemons.’’
• Why is it hard to tell in the case of a car?

18. Your reservation price for a good used car is $5000.
For a lemon is $1000. Given 20% of all cars are
lemons, we can predict that
• only lemons sell, for $1k each.
• both types of cars sell, for $4200 each.
• only good cars sell, fro $4200 each.
• both reliable cars and lemons will sell for $1k
each.

19. Expected Value
• You can’t tell if a car is a lemon.
• Therefore, your valuation is its expected value.
• -> Should pay its expected value.

20. How much information?.
Markets that people Markets that people
research before buying. research until MB=MC.

21. Will the Market Provide the Optimal
Level of Information?
• In theory, information could be bought and sold just like any other good or
service.
• BUT because information can be easily transferred from one person to the
next, it’s hard to keep people who don’t pay for information from benefitting
from it.
• Leads to a free-rider problem: any situation in which too little of a good or
service is produced because you can’t exclude people who don’t pay for a
good or service from benefitting from it.

22. Will the Market Provide the Optimal
Level of Information?
• People’s individual willingness to pay for information will be less
than the social benefit of the information (since the information
can costless be transferred to others).
– Similar to the existence of a positive externality
• Markets will provide too little information.

23. Will the Market Provide the Optimal
Level of Information?
• Example: go to Best Buy to learn about HDTVs, then buy online.
– Best Buy covers the cost of the information it provides by
charging a little more.
– If no one willing to pay the extra for a TV from Best Buy, Best
Buy will have a hard time providing good customer service.

25. Show-Rooming
Rise of smart-phones has resulted in consumers
going to individual stores, and then searching
for same product online to find similar prices.
What are some examples?

26. Show-Rooming
Rise of smart-phones has resulted in consumers
going to individual stores, and then searching
for same product online to find similar prices.
What is the ``story?’’

27. Show-Rooming
Rise of smart-phones has resulted in consumers
going to individual stores, and then searching
for same product online to find similar prices.
How do we think about it economically?