Chapter Introduction

"Economics of Information" is a phrase that means different things to different people. Information plays a role in all markets. People cannot buy and sell anything without information: who is willing to sell or to buy, on what terms, what is the quality of the good or service offered, how are these things likely to change in the future? When information on these things is plentiful, public or easy to get, and reliable, the simplest kind of supply and demand theory may be applicable. When information on these things is limited, unreliable, and more easily available to some people than to others, the simplest kind of market theory does not apply, and markets may not be as effective.

On the other hand, some organizations and enterprises exist mainly for the purpose of supplying information goods and services. This chapter is mainly concerned with the economics of information in this second sense: economic analysis of information suppliers. All the same, there are some connections between the two meanings. After all, when information is the stock in trade, it makes sense to suppose that information is going to be limited, more easily available to some people than to others (that is why the people who have it can sell it) and, in some cases, unreliable. In this chapter, however, these issues will largely be ignored. We will look at the economics of information suppliers from the point of view of the principles of economics, leaving the integration of the two kinds of economics of information for a more advanced study.

In studying the information industries we will be concerned with the typical questions of microeconomics: 1) Have information products any special characteristics that set them apart, economically, from other kinds of products and services? 2) If so, what characteristics? 3) What sort of markets are markets for information goods? Are they "competitive," in the sense of economic theory, or are there elements of monopoly? 4) Does a market equilibrium in information markets correspond to an efficient output, or would it be more efficient if the output were increased (or decreased) by comparison with the market equilibrium?

Definition