Reinventing the Bazaar: A Natural History Of Markets

Chapter 4 is a dissection of the effect that imperfect information has on the market for almost every good.

An interesting topic that McMillan presented was his belief that low quality goods drive down the price of higher goods due to a lack of information. This is because it is nearly impossible in this day and age to be an expert on everything in the market place, whether that is something simpler like milk or more complicated like a laptop. If information was free and perfect a customer could be reassured that they are not being "ripped off". Most consumers have no concept of what makes one laptop $500 and what makes another $2000. While this phenomenon may lead to some consumers purchasing the more expensive one versus the cheaper one due to what is often called "the snob effect", it more often leads to the consumer buying the less expensive option since it is easier for them to believe that they are getting their moneys worth so-to-say.

Transaction costs refer to costs associated with making a purchase or sale within a market. Not only does this refer to the actual currency and product exchange, but also to the information and search cost associated with actual attaining the product. This cost is something that is familiar to most people in the world today. For example when someone is at the mall, or the bazaar in this case, many people prefer to stick with the first option they come across rather than continue to search around the mall for other options. While on the other hand there are also people who value their money more than the inconvenience and will spend their time searching for the best available option.

Many effects arise from imperfect information but the largest effects are often higher prices and lower quality. Merchants can use this lack of information to raise their prices under the assumption that the consumer doesn't know any better. In this same sense they can also use it to decrease the quality of their product considering that the consumer does not have the expertise to know what the quality of the product should really be. Imperfect information is a huge positive for the merchant, while in the same sense an enormous disadvantage for the consumer.