Page 423 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 5. If the market is big then cost of search will .............. .
(a) less (b) more (c) nothing (d) none of these

6. According to Stigler the price dispersion in the market is .............. .
(a) Measurement of knowledge (b) Measurement of ignorance
(c) Measurement (d) None of the these

Salop’s Model

Salop forwards the sequential theory of Rothschild in his model. Because a buyer’s searching practice
is different from the other seller’s use the search behave our of a customer is different from other. They
take high price from the buyer who has high cost of search but they don’t search the shop who keep
less price. But the seller takes fewer prices that have less cost of search for the shop who keep less price.
Such pricing policies increase the profit to seller if the market’s buyer has high cost of search less price
elastic because the rich buyer who searches less will stop searching on high price. The other side the
poor buyer will continue the search till then they find the price is not less than the reservation price.
Salop says this is Stopping Rule.

A seller uses the noise as a maximum control technique to repartee the high price paying buyer from
low price paying buyer and to take less price from other buyers. Salop says such kinds of seller are ‘the
noisy monopolist’ creating noise it can be measured the number of searches by the buyer such practices
of price difference can be seen when the shops arrange random sale.
Salop starts with shopping role of sequential theory in which there is a optimal reservation price R is
needed by which the buyer accept any price that is equal or less to R which does not search any more
reservation price should be equal to cost of limited search. In other words, a change in reservation price
decreases the expected purchasing lost and increases the same amount searching cost.
Reservation price, number of searches (creating noise) and total cost of purchasing depend on the cost
of search per unit. The seller will take the price by which he gets maximum profit. Such prices depend
on the total cost of purchasing of a buyer and concern relating. As the demand of product will increase
with cost per unit search. If the unit cost of search is high the demanding cost will less plastic and there
will be more high searching cost (rich) buyer then the low searching cost (poor) buyer. Then the seller
will take high price from the rich buyer because the demand is less elastic for the product while he takes
the less price from the poor buyer whose demand is in elastic.

A consumer’s searching practice depends upon the distribution searching price cost.

30.2 Asymmetric (or Imperfect) Information

Joseph Stieglitz, Michal Spence and George Akerlof were awarded Nobel Prize of economic in
the year 2001 for their invention in the area of economic information. They challenged the concept
of classic and neo-classic that the market is well informed and it takes an especial definitive stage.
In same special situation, this concept makes very easy to the analysation, but it is unrealistic and
not always true. To take examples from the real market conditions, they studied the incompleteness
or defects due to incomplete information in market. Market is not capable to distribute their
unlimited factors and handles them sufficiently. Below we learn the asymmetric information and
their solutions.

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