Page 421 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Stigler believes that buyer will go to n number of shops and then buy with minimum priced shop. The
expected profit by search n is the decreased function of search. The expected profit is zero if the search
happens in long run. By the increasing cost of search, buyer will be in equilibrium on positive price
which is zero. This is the point where the expected profit of search is equal to cost of search. Stigler says
that the equalization the cost of search and the expected profit of search is a clarify theory, while a buyer
buys a unique product like camera, piano etc. The economists are called this Fixed Sample Sized Rule.
To describe this theory, suppose that after n search, expected minimum price is E (P ) and after n + 1
n
search, it is E (P n + 1 ). Suppose that buyer wants to buy a unit of product. The theory of Stigler hopes that
buyer will buy from those shops where the expected loss of price is equal to the marginal cost of another
search of a shop. Means,

E (P ) – E (P ) = C
n n+1
Where C is marginal cost of an extra search, which is the time to go to shop and the cost of transport.
There is a cost in search till every shop he visits. When he finds a shop which is minimum priced shop
then to go again on that shop, there is another cost of transport and if it is the last shop then it is called
Cost of Recall. Buyer will give Cost of Recall if it is low from last informative price and the difference
between minimum prices.

Self Assessment

Fill in the blanks:
1. In the view of time and transport, the cost of search is .......................... .
2. Market has asymmetric .......................... .
3. The cost of search is cost of .......................... .

Its Criticism

The theory of Stigler has been criticized on following bases:
1. Buyers does not know Distribution of Prices: The assumption that buyer does not know distribution
of prices, is not possible. Actually, the buyer does not know the price or distribution of prices or
what happens in market until he goes to market.
2. Knowledge of Cheap and Dear Shops: This theory believes that a consumer does not know which
shops sell a unique product on what price. Critics believe that it might be possible that a consumer
does not know which shop sells high irrespective of price but he has knowledge of cheap and dear
shops of market where he goes frequent to buy.
3. No Explanation of Price Dispersion: Stigler believes price dispersion as measurement of lack of
knowledge. But it does not clarify that what is Price Dispersion and how does it related to lack of
knowledge.
4. Unrealistic Decision to Determine the Number of Searches: The theory of Stigler believes that
a buyer fixed his search before visiting to shops. It is unreal. It is possible that after visiting some
shops, consumer gets new information which helps him to create a new plan of search.
5. Decision Rule not Optimal: According to Rothschild, the theory of Stigler that after equalizing
the profit of an extra search and its cost, he fixed the number of shops which he wants to search is
not optimal. He told that Optimal Rule is Sequential. It means that after knowing the price from
every shop, consumer decides about his search that whether he will continue or stop.
6. Decision Rule Ignores Information: The critics vote that the decision theory of Stigler ignores
the information of search. This information can change the decision of buyer. Suppose that there

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