information economics. the value of information
TRANSCRIPT
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Information Economics
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The value of information.
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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.
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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.
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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:
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Advertising: A provider of information? Disinformation? or is it a product on its own?
Let's decide for ourselves by looking at some advertisements.
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Do frogs and lizards convey information about Budweiser? Create loyalty? Do they “go with” a Budweiser beer?
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Ad for a Malaysian apartment complex, on the web.
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Old ad for Chesterfield cigarettes.
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An original ad for the Edison phonograph.
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Japanese ad for a Lassie movie ca 1950s.
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Ad for Bolivia on web.
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Canon ad just says: "If Elvis is selling, I'm buying.
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Ad for a Canadian library organization asks what does Elvis read: Fantasy.
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Elvis representing a Canadian canine club.
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Elvis skating for Mastercard.
Why do testimonials work?
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A Schlitz beer ad ca 1907.
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Painting found in Kentucky, apparently it was used as an ad for a stylish hair salon. For people who take their hair very seriously.
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An ad in 2001 for a Poetry meeting and contest.
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Comic looking ad for digital photography.
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Ad for an early Lincoln automobile.
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Paris looks good.
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Suppose you wanted to spend a week for two to four people in Paris--in this neighborhood.
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Price: $1200. For several 'pages' of details consult website.Do you need to know more?
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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?
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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.
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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.
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Asymmetric information and insurance.
1. Adverse selection
2. Different menus as a means to protect against adverse selection.
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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.
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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: