Question

Ex. Explain the intuition behind the result that enough informed consumers can force the limited-information market outcome to the competitive result (consider the tourist-native model: "A model in which some potential consumers have limited information about prices. The market contains a number of uninformed buyers (tourists) who have to incur search costs to find out about prices, and a number of informed buyers (natives) who have perfect information about prices"). What implication might this have regarding a government subsidy of Consumer Reports (a magazine filled with product characteristics and price information)?

Answer 1

Government subsidy on consumer reports which provide valuable information about the product and its appropriate prices is an effort to minimize the extra cost which an uninformed customer will pay in searching the right price of products and services, in comparison to the one who is well informed.

The enough informed customers can help to make the market more competitive by shrinking the limited information market and minimizing the events that lead the consumers to pay a price for searching the right price of products and services.