Information Economics

The value of information.

The role of information in perfect competition:

1. Why the demand curve is flat in this case.2. How information available to potential entrants affects “free entry and exit”.3. Why perfectly competitive firms do not usually advertise.

Information and advertising:

1. In the Phillip Nelson theory of ads, they are entirely informational.

2. Contrast the Santa Barbara theory

3. There is also a new theory of advertising called “The Advertising as a Complement Good” Theory.

Between the first two advertising theories, which is closest to the truth? a. Advertising as information? b. Advertising as a persuasive tool?

Try these examples:

Advertising: A provider of information? Disinformation? or is it a product on its own?

Let's decide for ourselves by looking at some advertisements.

Do frogs and lizards convey information about Budweiser? Create loyalty? Do they “go with” a Budweiser beer?

Ad for a Malaysian apartment complex, on the web.

Old ad for Chesterfield cigarettes.

An original ad for the Edison phonograph.

Japanese ad for a Lassie movie ca 1950s.

Ad for Bolivia on web.

Canon ad just says: "If Elvis is selling, I'm buying.

Ad for a Canadian library organization asks what does Elvis read: Fantasy.

Elvis representing a Canadian canine club.

Elvis skating for Mastercard.

Why do testimonials work?

A Schlitz beer ad ca 1907.

Painting found in Kentucky, apparently it was used as an ad for a stylish hair salon. For people who take their hair very seriously.

An ad in 2001 for a Poetry meeting and contest.

Comic looking ad for digital photography.

Ad for an early Lincoln automobile.

Paris looks good.

Suppose you wanted to spend a week for two to four people in Paris--in this neighborhood.

Price: $1200. For several 'pages' of details consult website.Do you need to know more?

How would you summarize these and other ads you have seen?

a. Information? b. Bends your tastes--creating a barrier to entry. c. Is it a good in itself, complementary to the primary product?

There is much more to information economics than advertising. Perhaps the most influential model of information is Akerlof’s “Lemons Model.”

1. The setup: Used car sales with asymmetric information. 2. Sellers well informed about their cars while buyers in the dark.

Q ua lity

Pro b a b ility

1/9

0 21 11/2½. . . .. ... .

Le m o ns M o d e l: N ine use dc a rs a re d istrib ute d o n the b a sis o f q ua lity--kno wn o nlyto the se lle rs.

Asymmetric information and insurance.

1. Adverse selection

2. Different menus as a means to protect against adverse selection.

Information via signalling and signposts:

1. the surgeon who advertises.

2. Cold War signals

3. the country that devalues

4. stockholders accept a buyout with low premium.

Consumer Error: Is it possible for us as consumers to be wrong about our preferences or about our ways of combining goods.

That is, can we be misinformed about our own preferences?

A last question: