Chapter 8: The Market for Information
8.1 INTRODUCTION An important application of the theory of market-making costs is to the market for information. It can be shown that there is a strong incentive for an entrepreneur to internalize the exploitation of the commercial information upon which his superior judgment is based. It is the internalization of commercial information that leads the entrepreneur to acquire control of assets, and hence links the entrepreneur to the management of a ﬁrm. In analysing this, it will be assumed that the entrepreneur is certain of the accuracy of the information at his disposal. There are ﬁve main ways in which an entrepreneur can exploit commercial information: 1. 2. 3. He can license the information. He can enter into bets with those who do not have the information and whose judgment as a result differs from his own. He can buy up assets which, given his information, are currently undervalued, with a view to reselling later. Once the information becomes public, other transactors will revalue the assets and he will make a capital gain. This strategy relies upon other people coordinating the use of resources once the information becomes public. It also depends upon other entrepreneurs creating the market for the assets. He can initiate the coordination himself. He can intermediate any additional transactions which the information indicates are required. He can also acquire control of any multi-purpose goods which need to be reallocated to another use. He can act as coordinator, but as delegate rather than principal. He can offer...
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