Wednesday, September 14, 2005

Economics, Information, and Quality Readings

I must admit that my knowledge of economics is poor; I therefore had a hard time reading the formulas in the ‘'The Market for Lemons’ piece. With that aside, I did glean some useful bits of information about how the quality of goods affects a market, particularly from pages 495 to the end of the chapter. Akerlof’s primary theme is that “dishonest dealings tend to drive honest dealings out of the market.” The problem stems from a frequent inability to distinguish good wares from bad. As a consequence, reputable sellers offer guarantees and warranties on their products to counteract this effect. Additionally, people who have the ability to easily distinguish between good and poor quality items within a given market have a great opportunity for success. Akerlof describes how a financial lender armed with “intimate knowledge of those around him…is able, without serious risk, to finance those who would otherwise get no loan at all.”

These same principles can be applied to the Internet today. We know that there is an abundance of “rotten” information available on the Internet. Will this contamination drive out legitimate websites in time? Who hasn’t been frustrated when their inbox becomes clogged with Viagra spam and it becomes a nuisance just to find the one legitimate email from Mom? Or, worse, when Mom’s email gets put in the junk folder because it happens to contain the word “free.” Clearly, there is a huge opportunity for companies who have the ability to distinguish good quality information from bad – just as the lender did in Akerlof’s piece. These are the spam filter companies, the children’s Internet filter companies and the pop-up blockers of the world. But I still believe that we need more accountability on the side of the web publisher. Just as Dell provides a guarantee on their computers and the University of Phoenix is accredited by The Higher Learning Commission – content published on the web should be certified in some way by a 3rd party organization. Search engines could then add certifications to their ranking algorithm and provide users with better quality information.

In the second reading, Boyle discusses the impact that price searching has the market; specifically that it tends to reduce the disparity of prices. What instantly came to mind in reading this chapter was Froogle. Instead of having to laboriously call store to store or scour the Sunday Paper ad section for a low price, buyers can now go online and quickly do a search for the lowest price on a given product. One would think that prices would become equal as a result of this power but in fact disparities remain because not every buyer is searching and not all sellers are advertising at any given moment. In addition, seller reputation, product warranty, product quality and e-commerce usability often weigh in over price when prices are relatively close. There’s nothing like an unsecured payment information page to scare buyers away.

It was interesting how Boyle relates the expense of searching (effort, time) with the results it yields. I have a friend who is constantly searching for the lowest price. He spends hours online looking for coupons, rebates, sales, etc. Ebay, not surprisingly, is his favorite website. From my perspective, this kind of effort is rarely worth the $5 I’m going to save. But perhaps it’s because of people like him and sites like Ebay that the disparities in price have become small enough to satisfy lazy people like me.


Blogger ross said...

How would your 'validation' scheme work, though? That's always been one of the big problems with internet filters, etc - there are just too many things to go through and verify all (or even a tiny subset) of it by hand...

On the other hand, I suppose, there are in some subsections of the web 'approved' lists - one that springs to mind is the National Science Digital Library, which basically aggregates 'kid-friendly' science resources online. While ranking all information across the board is hard, having some institutions provide their 'good' list is a step in the right direction, I suppose.

5:05 PM  
Blogger Katrina Rhoads said...

Is there a way to edit previous blogs? Janika pointed out today in class that I referenced Boyle when I meant to reference Stigler in my blog...

7:42 PM  

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