Chapter 13 Imperfect information in the product market

Abstract

Consumers are imperfectly informed. They do not know the characteristics of all the products in the market or the prices at which they are available at all sellers. There is no Walrasian auction ensuring that a particular commodity is sold at the same price by all stores. There is no Government Inspector ensuring that what appear to be two identical commodities are in fact identical. And given the myriad of variations in product characteristics, the consumer is constantly making decisions concerning whether the differences in qualities are worth the differences in prices. These informational imperfections have fundamental implications for the way product markets function, at least, for many of the commodities, which consumers purchase. These considerations may be relatively unimportant in the market for wheat or perhaps even in the market for steel. But elsewhere, they are potentially of considerable importance. They help explain why such markets are inherently imperfectly competitive, why prices may be considerably in excess of marginal costs, and why entry may be difficult. They help explain not only why equilibrium may be characterized by price dispersions but also why, in some circumstances, equilibrium must be characterized by price dispersions.