Informational Imperfections in Local Consumer Markets: a Preliminary Analysis

Loren V. Geistfeld, Ohio State University
E. Scott Maynes, Cornell University
Greg Duncan, University of Michigan
[ to cite ]:
Loren V. Geistfeld, E. Scott Maynes, and Greg Duncan (1980) ,"Informational Imperfections in Local Consumer Markets: a Preliminary Analysis", in NA - Advances in Consumer Research Volume 07, eds. Jerry C. Olson, Ann Abor, MI : Association for Consumer Research, Pages: 180-185.

Advances in Consumer Research Volume 7, 1980     Pages 180-185

INFORMATIONAL IMPERFECTIONS IN LOCAL CONSUMER MARKETS: A PRELIMINARY ANALYSIS

Loren V. Geistfeld, Ohio State University

E. Scott Maynes, Cornell University

Greg Duncan, University of Michigan

This special topics session focuses on the concept of consumer efficiency. One method of assessing how efficient individuals are as consumers is to examine the degree of price variation in a given market for a specific product variety. If there is much variability it suggests consumers, as a group, may not utilize resources as efficiently as possible. Since consumers have finite time and financial resources, it is to their advantage to search for a lower price to the point where the savings from an additional search does not exceed the costs of that additional search. This search will enable them to purchase more of a given product or free resources to purchase other products than if the product had been purchased at a higher price.

A primary cause of consumption inefficiency is informational imperfections in local consumer markets. When consumers are unaware of the existence or extent of price dispersion, products will be purchased at the most favorable price only by chance. In a recent paper Maynes (1978, p. 77) noted, "As a first approximation, a local consumer market is informationally perfect when a single price is charged by all sellers for the same quality. A market may be designated as informationally imperfect to the extent that different prices are charged for the same quality." An informationally imperfect market suggests that some consumers are experiencing reduced levels of welfare since they are paying more than necessary for a given product.

INFORMATIONAL IMPERFECTIONS: MEASUREMENT ASSUMPTIONS AND LIMITATIONS

In many situations informational imperfections can be assessed using a perfect information frontier which, in graph format with price and quality on the axes, is defined as "the positively sloped line segments connecting those points, representing price and quality, for which a given quality may be purchased for the lowest price" (Maynes, 1976, p. 65). This definition suggests that when using the perfect information frontier to assess informational imperfections in markets, both price and quality must be cardinal measures on a continuous scale.

The specification and measurement of product quality is no simple task. To avoid the vexatious problems associated with quality measurement, this study focuses on price variability within rather than across product varieties. (A product variety is a product/brand/model combination.) By using this strategy, it is possible to study price variability without measuring product quality and still not have quality cloud the analysis.

The first variable used to study informational imperfections within a market and differences between markets is relative range. This variable indicates the extent to which the maximum price for a given variety in a market exceeds the minimum price and is found by dividing the difference between the maximum price and the minimum price by the minimum price. Relative range is indicative of the extent of informational imperfection within a market with larger values being associated with greater informational imperfection.

A second key variable in this study is relative minimum. This variable expresses how the minimum price for a variety in one market compares to the minimum price found in other markets. It is the ratio determined by dividing the minimum price for a variety in a specific market by the largest minimum price for that variety across all markets studied. The relative minimum can be used to assess how competitive a specific market is relative to other markets since in those markets exhibiting the most competition one would expect to find the lowest price.

Two additional variables are studied. Minimum price, the first of these, is the lowest price for which a variety was sold in a market and is an important factor when assessing how significant a given product may be in the household budget. The last variable is the number of retailers selling a variety in a specific market. This variable, along with the number of varieties sold in a market, indicates the extent to which there is choice within a market.

Assumptions

For this study to successfully assess the degree of informational imperfection within a market, several assumptions noted by Maynes (1978, p. 78) must hold. First, the product varieties and retailers selected must accurately depict the choices available to some representative consumer in a given market. If this is not true then market analysis focuses on the pathological rather than the typical. Second, the price quote provided by the seller is the lowest price for which a product variety will willingly be sold to large numbers of consumers. Should this assumption be violated, the relative range will not depict the true degree of informational imperfection within a market. Third, consumers desire the lowest possible price for a given product variety. If consumers do not seek the lowest price, the use of relative range as a measure of informational imperfection is not valid.

Limitations

When assessing informational imperfection and comparing markets, one must be reasonably confident that the measured differences actually reflect informational imperfections. The first complicating factor is the extent to which the relative range may be affected by differences in seller characteristics such as service, friendliness, etc., rather than characteristics intrinsic to the product variety. If seller characteristics are perceived to be a significant factor, the relative range reflects differences between sellers as well as informational imperfections.

A second complicating factor is the extent to which a relative minimum or a relative range indicates differences in search costs between consumers rather than informational imperfections. For example, if one analyzed a bubble gum market finding the price at one store to be twice that of another store for the same brand, it would not reflect consumer ignorance as much as it would search costs. The possibility of saving a penny by going to another retailer to purchase the lower cost bubble gum is not worth the effort. To the extent that a product is relatively expensive or purchased in large quantities, this problem is minimized.

METHODOLOGY

Prices were collected for six products--blankets, porch/ deck paints, ten-speed bicycles, automatic dishwashers, microwave ovens, and pocket cameras--in Ann Arbor, Michigan, Ithaca, New York, and Minneapolis/St. Paul, Minnesota, during the summer and autumn of 1976. A common list of product varieties was drawn from issues of Consumer Reports between July 1975 and July 1976.

Individuals selected to collect price data in each of the markets were known by at least one of the authors. They were given detailed instructions, were provided data collection forms and were carefully coached as to how far and wide they should search for prices for a given product. The appropriate market over which they were to search was based on defining a market as "the set of sellers the consumer might consider if he possessed accurate information regarding the existence of sellers and brands as well as the range of prices and qualities available" (Maynes, 1976, p. 54). Since the authors were familiar with the three markets studied, they were able to provide an additional check as to how carefully the data collectors defined the respective markets.

In general, the data collectors' markets were based on the location of their residence. The Ann Arbor market was generally based on retail outlets in Ann Arbor and those on the Ann Arbor/Yspilanti border. Since Ithaca is a relatively small city, the market usually consisted of all retailers selling a given product. Minneapolis/St. Paul was the largest market. The data collector in this market lived in a north central suburb which resulted in a market consisting of retail outlets along major arterial routes, several regional shopping centers, and downtown Minneapolis.

FINDINGS

Tables 1-6 present the market information for the six products. Each table contains the minimum price for which a given product variety was sold, the relative minimum price, the relative range and the number of sellers. At the bottom of each table is the average for each of the variables except number of sellers. Average minimum price and average relative minimum are averages of the values listed. Average relative range was found by using only those values for which the number of sellers was greater than one.

Porch/deck paint is the only non-durable analyzed in this study. A quick scan of the three markets (Table 1) reveals that the number of sellers for a given variety is generally two or less which gives rise to low relative ranges for the three markets. It is also interesting to note that the average relative minimums are very similar (.96, .97, .95) and close to one. This suggests little price variation exists across the three markets.

The last five tables focus on durables ranging from blankets to microwave ovens. Table 2 contains the analysis for blankets. The relative range is lowest for Ithaca and highest for Minneapolis/St. Paul suggesting that informational imperfection is lowest for Ithaca and highest for Minneapolis/St. Paul. The average minimum is about the same for Ann Arbor and Minneapolis/St. Paul (.96, .98) while it is much larger for Ithaca (1.17). Based on this one could assert that prices are generally higher for blankets in Ithaca than in the other markets.

TABLE 1

PORCH/DECK PAINT: MINIMUM PRICE, RELATIVE MINIMUM, RELATIVE RANGE AND VARIETY AVAILABILITY FOR ANN ARBOR, ITHACA AND MINNEAPOLIS/ST. PAUL

TABLE 2

BLANKETS: MINIMUM PRICE, RELATIVE MINIMUM, RELATIVE RANGE AND VARIETY AVAILABILITY FOR ANN ARBOR, ITHACA AND MINNEAPOLIS/ST. PAUL

When interpreting the data for the bicycle market (Table 3), one should remember that both Ann Arbor and Ithaca are "college towns" which is likely to give rise to a higher density of bicycle ownership than one would normally expect. The minimum price is, on the average, quite similar for the three markets. The average relative range is the lowest for Ann Arbor and the highest for Ithaca; however, this must be accepted cautiously since there are few bicycles for which there are more than one or two sellers in any of the markets.

Dishwashers and microwave ovens are the two major appliances included in the study (Tables 4 and 5). The average relative minimum price for dishwashers is quite similar for the three markets (.94, .96, .98) suggesting on the average consumers can find equally favorable minimum prices in all markets. The relative range is the highest in Ithaca (.25) suggesting there may be more informational imperfection there. The extent to which seller differences may create some of the range differences is unclear but Maynes (1978, p. 85) reported that for pocket cameras certain sellers did not have consistently lower or consistently higher prices.

The microwave oven markets display much variation with respect to the minimum price. Ithaca has the lowest average relative minimum (.87) while Ann Arbor and Minneapolis/St. Paul have much higher values (.96, .99). The average relative ranges are similar for the three markets suggesting the amount of informational imperfection is the same.

The last product analyzed was pocket cameras (Table 6). Ann Arbor and Minneapolis/St. Paul have average relative minimums (.84, .85), much lower than Ithaca (1.0). This suggests the pocket camera market is more competitive in Ann Arbor and Minneapolis/St. Paul. The average relative range is the lowest for Ithaca (.14) suggesting the level of informational imperfection is greater for Ann Arbor and Minneapolis/St. Paul.

There are several findings which can be generalized when looking across the six products. First, the number of sellers for a given variety is generally highest for Minneapolis/St. Paul. This is especially true for dishwashers; however, pocket cameras are an exception. Second, the number of varieties sold in a market is generally lowest for Ithaca with blankets, ten-speed bicycles, microwave ovens and pocket cameras being the best examples of this. Third, none of the three markets are consistently high or low with respect to relative minimums and relative ranges; however, it should be noted that Ithaca demonstrates the greatest variation with respect to the average relative minimum.

TABLE 3

10-SPEED BICYCLES: MINIMUM PRICE, RELATIVE MINIMUM, RELATIVE RANGE AND VARIETY AVAILABILITY FOR ANN ARBOR, ITHACA AND MINNEAPOLIS/ST. PAUL

TABLE 4

DISHWASHERS: MINIMUM PRICE, RELATIVE MINIMUM, RELATIVE RANGE AND VARIETY AVAILABILITY FOR ANN ARBOR, ITHACA AND MINNEAPOLIS/ST. PAUL

TABLE 5

MICROWAVE OVENS: MINIMUM PRICE, RELATIVE MINIMUM, RELATIVE RANGE AND VARIETY AVAILABILITY FOR ANN ARBOR, ITHACA AND MINNEAPOLIS/ST. PAUL

TABLE 6

POCKET CAMERAS: MINIMUM PRICE, RELATIVE MINIMUM, RELATIVE RANGE AND VARIETY AVAILABILITY FOR ANN ARBOR, ITHACA AND MINNEAPOLIS/ST. PAUL

POLICY IMPLICATIONS

Policy implications must be accepted provisionally because of the pilot nature of the study. To help focus the earlier discussion of the findings, it may be useful to define those markets for which the average relative range is .10 or larger and the average product price is $50 or more as informationally imperfect. Using these criteria, the dishwasher, microwave oven and pocket camera market are informationally imperfect for the three markets. This suggests that consumers in these markets are not efficient. Some consumers are paying more than necessary for a given product variety which gives rise to the large variation in price. These are markets for which consumer information programs may be worth considering since the potential return to search is large.

It is not possible to draw inferences with respect to specific markets concerning informational imperfections since there was no consistent pattern for any particular market across most products. This suggests that it may be necessary to tailor consumer information programs for specific markets rather than classes of markets.

These policy implications should serve to whet ones' appetite for additional research into the informational imperfections of local consumer markets. It is only through research of this nature that consumer information programs can be tailored to meet the needs of consumers.

REFERENCES

Maynes, E. Scott (1976), Decision-Making for Consumers, New York: Macmillan Publishing Company.

Maynes, E. Scott, "Informational Imperfections in Local Consumer Markets," in Andrew A. Mitchell (ed.) (1978), The Effect of Information on Consumer and Market Behavior, Chicago: American Marketing Association.

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