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Unit-30: Economics of Information

Stigler’s Model Notes

In his column, “The Economics of Information” published in 1961, Stigler has shown that in market,
a product has limited or faulty information. The classic models of consumer behaviour believe that
information is full and consumer knows the minimum price of a product which he needs to pay. But
it is unreal because the consumer does not have any such information. According to Stigler, there is a
‘uniformed buyer’ for a unique product. For example, if consumer buys an unique camera, then he does
not know, which shop is selling in its minimum price. He does not certify that which shop is selling in
its minimum price or what is its minimum price until he collects information in market or goes shop to
shop.
Prof. Stigler gives his analysis by saying that price dispersion is ‘measurement of ‘lack of knowledge’
in market. Price Dispersion happens with homogenous products. By this a ignorant or unnoticed buyer
searches the minimum price of a product in market.

Its Assumptions
The information of search of Stigler is based on following assumptions:

1. There is unlimited information in market. The buyer has limited but seller has full knowledge about
a product.
2. The buyer has full knowledge of a limited region of a market.
3. He knows how the price is distributed and what it can be done. But does not know which shop takes
what prices.
4. The buyer has nothing but to get information in market for the minimum priced shop.
5. He went to a fixed number of shops and buys the product on shop which sells in a minimum price.
6. The cost of search is stable in the view of time and conveyance.

The Model
After giving this assumption, the main problem is that the consumer will go to how many shops or get
information from how many number of shops?
In Stigler’s model, the shop which takes minimum price in a region of market is “unknown truth of
world.” After visiting various shops, the price which buyer gets is an indication. Both unknown truth
(shop) and indication (price) are related probabilities that an indication is lower than the minimum (price).
Thus the buyer knows this probability that the searched price is lower than any minimum. This happens
due to uncertainty of market and the buyers are uncertain from the prices taken from various shops.
When buyer fixed a price then he selects the number of shops which he wants to go, and which is based
on various things along with the cost of information. The cost of information is time. The information of
search is also affected by the geographical area of market. If the market is big, then cost of information
will be high. A buyer who goes to a big market for information, the budget of his search will big and
he would go in little number of shops. If the market is small and the need of time is low then his cost of
search will low and he will go in many shops.
The optimal search is also based on the return of information of buyer. Expected profit is expected loss.
Generally, if a buyer expends a big money in a unique product then the search will give him expected
profit. He will give more time for search.
Thus, the decision rule for definite search by Stigler is the buyer fixed the number of shops for
information by the cost of expected profit by search. The buyer will search until the expected loss of
price per extra search is equal to the cost of extra search. In other words, the search will continue till the
point, when marginal profit will equal to its minimum marginal profit.

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