Reinventing the Bazaar: Chapter 4

This is a response to chapter four, "Information Wants to be Free," in the book, Reinventing the Bazaar: A Natural History of Markets by John McMillan.

In the reading I found the following quote very interesting:

"The mere existence of choice does not in itself ensure that the market operates competitively. For there to be effective competition, buyers must be able to easily compare the choices... Information is the lifeblood of markets. Knowledge of what is available where, and who wants it is crucial. A market works badly if information does not flow through it."

Consumers being able to choose is a significant factor in defining price. Because a consumer can choose another seller, prices are competitive. In some markets the ability to choose another seller does not create a competitive market. I thought this quote was interesting because it shows how when sellers are able to withhold information from buyers, it is often to the sellers advantage. This is interesting in relation to tourists purchasing items in the Marrakech bazaar in Morocco. The tourists cannot easily find out where the cheapest priced items are and to search extensively for where these items are would be just as costly as buying the item from the first or second seller they encounter. Information about where the cheapest priced goods are located is not available in this market, allowing the sellers to have greater control over the price. The second part of the quote talks about how information and knowledge are so important to a successful market. With freer information, buyers are able to locate the goods and prices that best suit their needs, it is also to the sellers advantage to be located by these consumers. The greater the information available the more competitive and effective a market is.

The author talks quite a bit about transaction costs in this chapter. I understood transaction costs to be the costs associated with purchasing a good. This would not include the actual cost of the good, but things like time it took to compare the good to other goods and assessing the quality of goods. McMillan talks about how on the internet the cost of comparing the prices of the same or similar goods is very easy, making this transaction cost zero. In contrast to this he talks about how the internet makes it more difficult to ensure the quality of goods. The transaction cost of ensuring quality may be higher if a buyer wants to investigate buying from smaller online businesses. Internet consumers often reduce this transaction cost by buying from brands they know and trust to be of good quality.

With perfect information in a marketplace, all people in the marketplace know all the information about everything. But perfect information rarely is completely available in a marketplace, so let's consider the effects of imperfect information. Consumers would be greatly affected by imperfect information. If they are unable to easily compare prices, they will likely end up paying a higher price than necessary. They also are unable to ensure the quality of the goods they purchase, and may not be trusting of sellers. This mistrust is a disadvantage for the seller because buyers will be less willing to purchase goods, particularly from sellers they are unfamiliar with. The seller do have an advantage in that they can produce goods of worse quality than competitors and the buyer has no way of knowing this. They also have more control over the price because consumers have difficulty comparing prices. Though the sellers come out on top in some ways when information is imperfect, overall the market will be less successful, with fewer transactions occurring and many people unable to trust from whom they purchase.