Behavioral Perspectives on the Economics of Information: an Overview

ABSTRACT - This paper summarizes the content of a special topic session that sought to encourage more interdisciplinary research on how information affects the functioning of markets.

Citation:

Paul N. Bloom (1988) ,"Behavioral Perspectives on the Economics of Information: an Overview", in NA - Advances in Consumer Research Volume 15, eds. Micheal J. Houston, Provo, UT : Association for Consumer Research, Pages: 232-233.

Advances in Consumer Research Volume 15, 1988      Pages 232-233

BEHAVIORAL PERSPECTIVES ON THE ECONOMICS OF INFORMATION: AN OVERVIEW

Paul N. Bloom, University of North Carolina at Chapel Hill

ABSTRACT -

This paper summarizes the content of a special topic session that sought to encourage more interdisciplinary research on how information affects the functioning of markets.

INTRODUCTION

The purpose of this session was to stimulate behavioral research on issues and problems that have traditionally been the concern of economists from the sub-area of "Economics of Information." These economists have studied how information affects the way markets function. They have examined what kinds of information and market conditions lead to positive outcomes for consumers and society, while at the same time identifying situations where information problems can produce market failures (c.g., restrictions against advertising3. Most of the propositions and predictions they have made about the effects of information are based on theoretical (mathematical) models, although there have been some empirical studies typically mating use of aggregate economic data that have provided valuable insights and support. In general, economists have not put their assumptions about individual consumer behavior (upon which their models and empirical studies are based) to the kind of empirical testing with which consumer researchers would feel most comfortable (e.g., experiments, surveys, observation).

The notion that benefits would accrue from a dialogue between economists and consumer researchers about information has been aired on many occasions. For example, two conferences were held in the late 1970s (at Carnegie-Mellon, with a proceedings edited by Mitchell (1978), and at the University of Rochester, with a proceedings edited by Wilde (1980)) which had primary goals of fostering more interdisciplinary research on how information affects markets. This session sought to reinforce and update the appeals for interdisciplinary work made at those conferences.

Six paper presentations were made during the session. The first two papers provided overviews of the field and pointed to previous and potential consumer research studies that could help to resolve several of the issues identified by economists. The second two papers reported on recent empirical tests of specific propositions from the economics literature. Finally, the last two papers examined how certain markets have been affected by information "problems." Further information about the papers is presented below.

REVIEWS OF THE FIELD

The paper by Calfee and Ford (1988) contained a comprehensive summary of economics of information theory. The salient assumptions and predictions about consumer behavior contained in the theory were identified, and some of the relevant findings from the consumer behavior and cognitive psychology literature (that bear on the economists' theory) were reviewed. Opportunities for future research and implications for public policy were also covered.

The paper by Lynch and Bloom (1988) reviewed a narrower body of economic theory, focusing on the work in the economics of advertising. An attempt was made to "translate" the arguments and propositions offered by two major"schools of thought" about the economic effects of advertising the "Advertising=Market Power" school and the "Advertising=Information" school (Albion and Farris 1981). It was argued that the two schools would tend to disagree on how the following basic questions about consumer behavior would be answered:

1. How many advertising messages must a consumer be exposed to before he or she allows a new brand to be included in an "evoked set?" Does the number differ depending on (1) the extent of advertising of established brands, (2) the type of attribute being advertised (e.g., "new" vs. "old," intrinsic vs. extrinsic) or (3) the category of the product (e.g., search vs. experience)?

2. Does advertising affect the "weights" that consumers place on attributes when combining information to form judgments about perceived quality and perceived value?

3. Do consumers learn enough accurate information about the attributes of products from advertising to improve the efficiency with which they search? Or does miscomprehension of advertising lead to less efficient search behavior?

4. Do consumers ignore or discount information in advertising about the intrinsic attributes of experience goods?

5. Do consumers view heavy advertising as a "signal" that an experience good is high in quality and value?

Previous consumer research studies that can provide at least partial answers to some of these questions were reviewed. In addition, promising directions for future research were suggested.

EMPIRICAL EVIDENCE

Ford, Smith, and Swasy (1988) presented a paper that examined the validity of one of he most widely accepted assumptions in the economics of information literatureCthe notion that products can be divided into the categories of search, experience, and credence goods (Nelson 1970, 1974, 1978; Darby and Karni 1913). One of the propositions offered by Nelson and others is that advertising for search goods should have many objective claims (since consumers can evaluate them effectively before purchasing), while advertising for experience and credence goods should have less objective claims (since consumers cannot evaluate them before purchasing and will therefore discount or ignore such claims). Ford, Smith, and Swasy (1988) performed a content analysis of a sample of print advertisements to see if the use of objective claims varied by type of good.

The Calfee and Ringold (1988) paper specifically examined the proposition offered by Nelson (1970, 1974, 1978) that consumers are skeptical of advertising claims, particularly of those offered for experience and credence goods. They reported on the results of several major public opinion polls that accumulated evidence about the skepticism of consumers toward advertising.

POTENTIALLY PROBLEMATIC MARKETS

Zeithaml and Bloom (1988) presented a paper that looked at a set of situation i where information problems can produce poor market outcomes. They argued that in markets where consumers tend to rely more heavily on extrinsic attributes (e.g., price, amount of advertising, brand name) than on intrinsic attributes in forming judgments about product quality and value, a strong possibility exists that consumers may allocate their resources in a manner that does not serve them the best. Consumer reliance on extrinsic attributes was seen as creating problems in markets where the following questions would be answered negatively:

1. Are the extrinsic attributes relied upon by consumers accurate "signals" or predictors of the other attributes of the brands?

2. Are there no other attributes that consumers value highly?

3. Is it possible for consumers to obtain information about the other valued attributes?

4. Do many sellers have the ability to look good on the extrinsic attributes relied upon by consumers?

Markets for professional services, some grocery products, and several other offerings were hypothesized to be ones where negative answers to the above questions would be likely to occur. Potential public policy remedies for these situations were also discussed.

The paper by Drumwright and Kane (1988) focused on the health care industry. They addressed whether the new forms of information about health care that have become available to consumers in recent years (e.g., advertising) have lived up to their promise. Other information shortcomings in health care were also addressed. Finally, potential public and corporate policy approaches for remedying the information problems in health care were discussed.

DISCUSSANTS

The discussants for the session were two well-known economists who have both written extensively about the economics of informationCHoward Beales of the Federal Trade Commission and Richard Schmalensee of M.I.T. Beales (Beales, Craswell, and Salop 1981a,1981b) has written and spoken about the role of information in consumer protection, while Schmalensee (1972, 1978) has been a leading thinker about the economic effects of advertising.

REFERENCES

Albion, Mark S., and Paul W. Farris (1981), The Advertising Controversy: Evidence on the Economic Effects of Advertising, Boston: Auburn House Publishing Company.

Beales, Howard, Richard Craswell, and Stephen Salop (1981a), "Information Remedies for Consumer protection," American Economic Review, 71 (May), 410-413.

Beales, Howard, Richard Craswell, and Stephen Salop (1981b), "The Efficient Regulation of Consumer Information," Journal of Law and Economics, 24(December), 491-539.

Calfee, John E. and Gary T. Ford (1988),"Economics, Information and Consumer Behavior," in M. Houston, ed., Advances in Consumer Research: Volume 15, Provo, UT: Association for Consumer Research, in press.

Calfee, John E. and Debra J. Ringold (1988), "The Skeptical Consumer Fact or Fiction," in M. Houston, ed., Advances in Consumer Research: Volume 15, Provo, UT: Association for Consumer Research, in press.

Darby, Michael and Edi Karni (1973), "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, 16(April), 67-88.

Drumwright, Minette E. and Nancy M. Kane (1988), "Successes and Failures of Information in Health Care Markets:-Cases in Point," in M. Houston, ed., Advances in Consumer Research: Volume 15, Provo, UT: Association for Consumer Research, in press.

Ford, Gary T., Darlene Smith, and John L. Swasy (1988), "An Empirical Test of the Search, Experience and Credence Attributes Framework," in M. Houston, ed., Advances in Consumer Research: Volume 15, Provo, UT: Association for Consumer Research, in press.

Lynch, John G. and Paul N. Bloom (1988), "Behavioral Perspectives on the Economics of Advertising," working paper, University of North Carolina at Chapel Hill.

Mitchell, Andrew A., cd. (1978), The Effect of Information on Consumer and Market Behavior, Chicago: American Marketing Association.

Nelson, Philip (1970), "Information and Consumer Behavior," Journal of Political Economy, 78 (March/April), 311-329.

Nelson. Philip (1974), "Advertising as Information," Journal of Political Economy, 82 (July/August), 729-754.

Nelson, Philip (1978), "Advertising as Information Once More," in D. Tuerck, ed., Issues in Advertising: The Economics of Persuasion, Washington, D.C.: American Enterprise Institute.

Schmalensee, Richard (1972), The Economics of Advertising, Amsterdam: North-Holland Publishing Company .

Schmalensee, Richard (1978), "A Model of Advertising and Product Quality," Journal of Political Economy, 86 (June), 485-503.

Wilde, Louis L. (1980), "The Economics of Consumer Information Acquisition," Journal of Business, 53 (DO. 3, pt. 2), 143-158.

Zeithaml, Valarie A. and Paul N. Bloom (1988), "The Influence of Extrinsic Cues on Consumer Evaluations: Implications for Consumer Welfare and Public Policy," working paper, University of North Carolina at Chapel Hill.

----------------------------------------