CHAPTER 5 • Uncertainty and Consumer Behavior 175
EX AMPLE 5. 4 THE VALUE OF INFORMATION IN AN ONLINE CONSUMER
ELECTRONICS MARKET
Internet-based price comparison sites offer a valuable informational resource to consumers, as shown
by a study of a leading price-comparison website,
Shopper.com. Researchers studied price information provided to consumers on over 1,000 topselling electronics products for an 8-month period.
They found that consumers saved about 16% when
using this website versus shopping in the store,
because the website significantly reduced the cost
of finding the lowest priced product.8
The value of price comparison information is
not the same for everyone and for every product. Competition matters. The study found that
when only two firms list prices on Shopper.com,
consumers save 11%. But the savings increase with
the number of competitors, jumping to 20% when
more than 30 companies list prices.
One might think that the Internet will generate so
much information about prices that only the lowestprice products will be sold in the long run, causing
the value of such information to eventually decline
to zero. So far, this has not been the case. There are
fixed costs for parties to both transmit and to acquire
information over the Internet. These include the costs
of maintaining servers and the fees that sites such
as Shopper.com charge to list prices at their sites.
The result is that prices are likely to continue to vary
widely as the Internet continues to grow and mature.
You might think that more information is always a good thing. As the following example shows, however, that is not always the case.
EX AMPLE 5. 5 DOCTORS, PATIENTS, AND THE VALUE OF INFORMATION
Suppose you were seriously ill and
required major surgery. Assuming you
wanted to get the best care possible,
how would you go about choosing a
surgeon and a hospital to provide that
care? Many people would ask their
friends or their primary-care physician for
a recommendation. Although this might
be helpful, a truly informed decision
would probably require more detailed
information. For example, how successful has a recommended surgeon and her
affiliated hospital been in performing the
particular operation that you need? How many of her
patients have died or had serious complications from
the operation, and how do these numbers compare
with those for other surgeons and hospitals? This kind
of information is likely to be difficult or impossible for
most patients to obtain. Would patients be better off
if detailed information about the performance records
of doctors and hospitals were readily available?
Not necessarily. More information is often, but not always, better.
Interestingly in this case, access to performance information could actually
lead to worse health outcomes. Why?
Because access to such information
would create two different incentives
that would affect the behavior of both
doctors and patients. First, it would
allow patients to choose doctors with
better performance records, which creates an incentive for doctors to perform
better. That is a good thing. But second, it would encourage doctors to limit their practices to patients who are in relatively good health.
The reason is that very old or very sick patients are
more likely to have complications or die as a result
of treatment; doctors who treat such patients are
likely to have worse performance records (other factors being equal). To the extent that doctors would
be judged according to performance, they would
8
Michael Baye, John Morgan, and Patrick Scholten,” The Value of Information in an Online
Electronics Market.”Journal of Public Policy and Marketing, vol. 22 (2003): 17–25.
