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Information Failures: The Bazaar

Geoff Riley

27th February 2011

Teeming with thousands of visitors, a bazaar appears to provide a rich seam of material for students of the market mechanism. Ercole Durini di Monza writes about them and the potential for information gaps as buyers and sellers look eachother in the eye.A bazaar is a permanent marketplace where a countless diversity of goods and services are sold (as well as exchanged), with the prices usually being quite low to achieve a high enough demand for a particular product and therefore generate profit. The bazaar first began in Iran, before becoming ubiquitous across much of the Middle East and North Africa. The bazaar is a paragon of a market-place where information gaps are present, as in almost every transaction made in the bazaar, the consumer will haggle with the owner of the shop armed with insufficient information vis-à-vis a product.

Asymmetric information in a bazaar is a fact of life in bazaars that cater by and large for the tourist market. Using Akerlof's model of 'peaches and lemons', many sun-drenched consumers would know not which of the thousands of products a shop-owner in a bazaar normally has to offer would be a peach, and which would be a lemon. Often the shop-owner will state a price which is astronomically high, and even though there is an information gap in that the consumer is not fully aware of the various costs and benefits that may be associated with buying a particular product, they would sense that they would be getting a bad deal, and would therefore bargain.

A quick burst of haggling ensues, in which the consumer tries to lower the retail price to something which he/she would recognise as being closer to the true value of the product, until eventually settling on a final price. However, even though the price may have become more realistic, the information gap means that the consumer will rarely pay exactly what he/she thinks is the exact value of the product, allowing the shop-owner to maintain a useful producer surplus.

What is interesting to note about bazaars in particular is that there are specific areas where only one generic product is handled and sold between innumerable small shops. There would be an alley for carpets, an area for ceramics, or a section of the market set aside for jewellery. This shortens the information gaps present in a bazaar as one can find a complete mixture of asking prices for the same product in a confined space. The cost of searching for a better deal is noticeably lower and the balance of power tiltsever so slightly back to the customer.

If the shop-owners had their way, there would be a complete mix of all the shops in a bazaar, as then one would have to walk for a long time to find another shop that sells a similar product - but sellers benefit too as they can share goods and materials to make new products or ask each other for favours. The spacing and design of the bazaar thus helps sellers combat their own information failure as if (for example) the shops selling carpets were spaced throughout the whole market, shop-owners would find it more difficult to know what price they can bargain down to in order to maintain sufficient demand and therefore revenue.

Possible solutions to these information failures could be the provision, by the sellers, of warranties and guarantees to the consumer when a good is purchased. For example, if a teapot breaks within a week, then the shop-owner would be willing to supply a brand new one. This helps breach the information gap and could actually signal to consumers which products are peaches and which are lemons due to the length of a particular warranty. The bazaar could even set up an internet page which could be used for consumers to inform each other of particular deals or special finds in certain areas of the bazaar, as then other consumers, when they visit, would be better informed about certain shops and where to go and where not to go, thus reducing the ubiquitous asymmetries of information.

Shop-owners themselves could instigate a model of choice architecture into the design of their shop, in which they would put all of their peaches on prime display, and therefore nudge the consumers towards those particular products, therefore identifying for the consumer the higher quality (and more expensive, unfortunately) products

The bazaar itself may have its own regulators and officials who check up on individual shops and make sure that their products remain within a certain quality, and that there is no clear manipulation of asymmetrical information for their own benefit i.e. they work on behalf of the consumer. Although highly unlikely due to the independence and uniqueness of nearly all the shops in a bazaar, kite-mark schemes could also be implemented on certain products to show that they have attained a certain band of quality, which would better inform consumers as to which are peaches and which are lemons.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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