Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAPTER 15
The Economics of
Information
15.1 THE ECONOMICS OF SEARCH
Search costs refer to the time and money we spend seeking information about a product. The general rule is
to continue the search for lower prices, higher quality, and so on until the marginal benefit from the search equals
the marginal cost. In most instances, advertising provides a great deal of information and greatly reduces consumers’
search costs, especially for search goods. These are goods whose quality can be evaluated by inspection
at the time of purchase (as opposed to experience goods, which can only be judged after using them).
EXAMPLE 1. Information available to individuals, consumers and firms is increasing by leaps and bounds as a result of
the development of the Internet. The Internet or simply “the Net” is a collection of more than 100,000 computers throughout
the world linked together in a service called the World Wide Web (www). In 2005, about 200 million people scattered
throughout the world were connected through the Web, with hundreds of thousands of new individuals joining each
week. Half of the on-line community is now outside the United States. In a few years, more than 1 billion people and
300 million PCs are expected to be connected to the Internet. In short, the entire globe is very rapidly becoming a single
unified information superhighway through the Internet. An individual can now use the Internet to browse through a
firm’s catalogue, click on a “buy” button, and fill in an electronic order form, including shipping and credit-card information.
15.2 SEARCHING FOR THE LOWEST PRICE
At any time, there will be a dispersion of prices in the market even for a homogeneous product. A consumer
can accept the price quoted by the first seller of the product he or she approaches, or can continue the search for
lower prices. The consumer should continue the search for lower prices as long as the marginal benefit from
continuing the search exceeds the marginal cost of additional search. In general, the marginal benefit from
searching declines as the time spent searching for lower prices continues. Even if the marginal cost of additional
search is constant, a point is reached where MB ¼ MC. At that point, the consumer should end the search. The
approximate lowest price that expected with each additional search is:
Range of Prices
Expected Price ¼ Lowest Price þ
Number of Searches þ 1
EXAMPLE 2. Suppose that the price range for a small portable TV of a given brand is between $80 to $120. All sellers are
identical in location, service, and so on, so that price is the only consideration. Suppose also that sellers are equally divided
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