A Bayesian Model of Demand for Information About Product Quality

WHENEVER THERE IS UNCERTAINTY about product quality a consumer may benefit from obtaining information about the performance of commodities; indeed the choice of what information to purchase becomes an essential part of the consumption decision. Consumers acquire information from a variety of sources. For some commodities it is possible to test small amounts of a product before making a large purchase; taking a test drive in a car is an example. In other cases information is gathered informally from acquaintances. In yet other instances, information is supplied by newspapers, magazines and consumer information organizations. Regardless of the method used to collect information, the acquisition process is usually costly, sometimes in terms of time and often in terms of money. When the consumer makes the decision to purchase information he weighs these costs against the benefits of being informed. The purpose of this paper is to develop a theory which explains consumer expenditures for product quality information. The theory is related to the neoclassical consumer theory but differs from it in several critical respects. There are important reasons why the standard consumer theory is inappropriate for the study of information demand. The primary reason is that information is fundamentally different from other commodities, and the difference is crucial. Consumers demand most other commodities for the desirable attributes they possess, whereas information possesses none of these attributeS. A consumer purchases information because it helps him to make "better" purchases. The demand for information is therefore a derived demand that only arises when product quality is uncertain. These special features of information may give rise to demand behavior quite different from that usually observed for commodities. Since the neoclassical theory cannot be interpreted to incorporate the special features of information it is unable to explain the unique properties of information demand. The theory presented in this paper should also be constrasted to Stigler's early contribution [10] to the economic theory of information. Stigler investigated consumer demand for information about prices of products. He did not treat the demand for information about product quality. Nor is it possible to simply extend his analysis to explain consumer demand for product quality information. The demands for the two types of information arise for different reasons