Consumer Behavior and Belated Information: The Case of Uncertain Tastes

This paper analyzes optimal search and consumption strategies for consumers with respect to goods for which tastes are unknown prior to actual consumption of the good. The form of an optimal strategy is characterized and certain comparative statics results derived. Of particular interest is the possibility that an increase in search costs might actually increase pre-initial purchase search

Market Search Models: A Selective Survey

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Consumer Behavior Under Imperfect Information: A Review of Psychological and Marketing Research as It Relates to Economic Theory

In recent years, theoretical economists have begun to examine the effects of imperfect information on the existence, uniqueness, and efficiency of market equilibria, both in labor markets and in consumer product markets. Two significant conclusions can be drawn from this literature: (1) the properties of market equilibria are extremely sensitive to the search strategies used by consumers or workers, and (2) the key to “stabilizing” markets at price or wage distributions which are competitive in an appropriate sense is direct comparison shopping. With direct comparison shopping, consumers, for example, actually compare brands to each other and choose the best from those that they have seen. Economists commonly assume that consumers search by defining a hypothetical reservation (or cutoff) level against which brands or jobs are compared sequentially. Economic theory, however, is not (or at least has not been) very useful in identifying which search strategies are appropriate to specific informational settings. Moreover, since consumers and workers who face positive information acquisition costs are likely to choose a “satisfactory” alternative rather than an “optimal” one, the issue of which search strategies people should use may only be resolvable empirically

Criminal Choice, Nonmonetary Sanctions, and Marginal Deterrence: A Normative Analysis

This paper develops a normative model of optimal sanctions in the Becker Tradition which emphasizes the role of marginal deterrence. The paper complements Shavell's 1987 American Economic Review paper, the essential difference being that Shavell's model concentrates on variations in the sanction imposed within a single category of acts (a specific crime) while the model in this paper concentrates on variations in the sanction imposed across categories of acts (different crimes). In their most general formulations, neither Shavell's model nor the model developed in this paper yields the result that acts with greater social harm should receive greater sanctions. But special cases, which readers may or may not find reasonable, do yield that result, within crimes for both models and across crimes in the model developed in this paper. This paper also identifies the necessary condition of jointness in the cost of law enforcement in the case of comparisons across crimes

On the formal theory of inspection and evaluation in product markets

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On the Formal Theory of Inspection and Evaluation in Product Markets

This paper builds a formal theory of consumer behavior under imperfect information when goods are described by multiple characteristics which vary in their degree of "observability." An optimal strategy for the consumer is shown to exist. In general, this strategy is shown to involve both inspection (sampling to observe general characteristics of goods) and evaluation (consumption of goods to observe specific characteristics). Comparative statics of the optimal strategy are also analyzed

An Information-Theoretic Approach to Job Quits

This study analyzes the existence of quits as part of optimal job-shopping strategies by imperfectly informed workers. Formally this is modeled as a sequential decision problem in which jobs are assumed to be described by more than a single parameter. These multiple characteristics vary in their respective degrees of observability. Along with a characterization of the optimal strategy and a proof of the existence of a positive quit rate, comparative statics results are obtained

Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests

The existence of imperfect information is thought to provide firms with incentives to degrade contract quality by supplying terms that well-informed consumers would refuse. We show, in contrast, that these incentives are weaker than is commonly supposed; rather, when consumers gather relatively little information, the profit maximizing strategy for firms is likely to involve offering the contract terms that consumers prefer, but at supracompetitive prices. In consequence, a standard state response to imperfect information problems, regulating the substantive terms of transactions, is often misplaced. When imperfect information exists, the state instead should reduce the costs to consumers of comparison shopping for contract terms, because such shopping reduces prices and also reduces further the incentive of firms to degrade contract quality