Information and Investment #3

Chapter VI of Information and Investment is The Assortment of Production, or in other words, product differentiation.

Usually economic models assume a fixed set of goods and services, for both consumers and producers. But it is important to deal explicitly with the qualitative composition, for the variety of production is quite great. If we wish to consider, as does an entrepreneur, what kinds and qualities of goods to produce.

Consumers buy goods because of the satisfaction they expect to receive. They also experiment when making purchases as part of an endeavor to find newer and better ways of meeting their desires. Businesses also experiment with product variations to find newer and better ways of meeting customer satisfaction. Most formal economic models, especially the perfect competition model, ignore this.

Imagination, rather than information in an ordinary sense, is what entrepreneurs require in order to discover new ways of combining resources to meet consumers’ desires. Undiscovered ways of production are somewhat like musical tunes awaiting discovery. Often the competitiveness of a market is associated with or defined in terms of the cross elasticity of demand for the products sold in it. A high degree of competitiveness in this sense is much greater in reality than in the so-called pure competition model, which recognizes only price.