No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Six: Applications in Markets 136 Search and information costs include all aspects of suppliers and demanders finding out the necessary information to arrange a deal. As a demander, you may have researched the purchase of a new athletic shoe. You probably compared shoes online, asked friends about their experience, or perhaps drove to different stores to try on the actual shoes before making a purchase. Your time, the costs of the Internet, gas, and wear and tear on the car are all examples of transaction costs. You will ultimately have paid far more than the dollar cost you pay to the store itself. Likewise, suppliers face search and information costs. How do they know where to market their goods? Which stores should they sell to? Which middlemen are reliable enough that they want to have a relationship with? Businesses may pay for consumer research if they are large enough, but even very small business owners will give considerable thought in to how they might make their product more attractive to potential new buyers and how they might reach them. All business owners face these costs to some degree. As I mentioned before, I buy and sell small items regularly on Craigslist and eBay. I have to take the time to take a photo (since that always seems to help the sale), transfer it to the computer, and write the ad. I spend some time on each item, thinking about why someone might want to buy the item used , and I try to put myself in their shoes so I can include any information they might need and so I can present the item in the best possible light to them. Have you ever sold anything? How did you find the buyer? How did you communicate to him or her? These are transaction costs: costs just as real as the dollars the person buying from you or me paid. In fact, if you’ve sold something before, you undoubtedly priced your time into the sale of the item. I occasionally have an item that I know someone could use and would pay a small amount of money for, yet I end up putting in the trash. Why? Transaction costs—it’s just not worth the hassle of the search and information costs to find out who they are. A similar type of transaction cost is transportation costs . Let’s say I want to sell an older car engine, which is very heavy, and I have a local buyer who will pay me $100. It doesn’t mean too much to me when I live in Albuquerque to know there is a potential buyer of an item in Seattle who would pay $125 for the same engine. It might cost $200- $300 to ship it, not to mention my time and effort to package it for shipping and deliver it to UPS. This is a large part of the explanation of price differentials between different areas of the country. Consider our earlier strawberry example in Figure 6.5 . One of my favorite strawberries when I lived in Santa Maria, California, came from a field that sold a variant of Chandler strawberries. These were smaller and very sweet, and only sold locally from the field. The farmer had other strawberries that he sold to customers elsewhere. The reason is that these particular strawberries would go bad in about 2 days—they would never survive the delays associated with shipping. In this case, the transportation cost eliminated the whole market—people in Detroit can’t purchase these on the market, so they have to purchase less tasty strawberries and they’ll still pay more than the people in Santa Maria. Transportation costs: the cost to transport goods from a seller to a buyer—to bring the good to a market.