Saturday, July 4, 2009

it's a gas (tank)....ahhh, not so much

From the AP's Sandy Shore in the C-J...

Backyard grillers may get a little steamed now that the summer grilling season is under way. When they're out buying refilled propane tanks, they'll likely find that they will be getting less fuel for their money than at this time last year.

When oil prices soared in 2008, propane suppliers quietly reduced by 2 pounds the amount of gas pumped into each 20-pound tank, saying they wanted to avoid raising prices. Since then, propane prices have been cut in half as the price of oil has dropped. But smaller refills are still being sold nationwide by many dealers, and most buyers are unaware because the tank is the same size.

"It's a price increase," retired lawyer Stuart Barr said recently as he swapped a tank at a Home Depot store in Denver. "I'm a great believer in full disclosure. Give me the information."

The problem, consumers say, is that no one tells them they're getting less propane. Companies have adopted similar practices in the packaging of coffee, sugar and laundry detergent....

This is an interesting example of what economists call "information problems". Basic economic models start with the assumption of "perfect information"-- a reduction that allows us to focus on factors that are usually more dominant in explaining market outcomes. To note, information is never perfect, but it's rarely messed up "enough" where it takes us beyond "normal" market transactions to something else.

Economists then turn to instances of highly limited info-- or especially, to asymmetric info (when one party has an info advantage on the other). The latter is akin to monopoly power, where the one can exert "power" over the other. For example, if I know a lot more about my car than you do, then I can take advantage of that knowledge. (On the other hand, you know that I know, so you're likely not to trust me &/or to seek other competent sources of info. So, the market works to even out these things.)

In this context, the info is fully available, but customers are likely to ignore it (I see this as the purchase of a tank not pounds of gas) or not be able to process it (I see the weight, but don't remember that the weight used to be higher).

Do we let the market handle this (including nice little newspaper articles and blog posts to explain it!) or should we rely on regulation (requiring more aggressive info transfer)?

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