First, the seller must open what I'll call a channel of exchange with willing
buyers. This is the problem of transactions cost
that we've been dealing with in earlier lectures in the course.
The seller can open the channel of exchange with willing buyers, by lowering
the transaction costs that frustrates transactions between sellers and willing
buyers. So, for example, the seller can make it
easier for buyers to find out who the sellers are, to find out what the terms
of trade that the sellers are offering are, and the sellers can find new and
better ways to move good from one person to another.
So, sellers are continually trying to lower the transaction costs that separate
them from wiling buyers, and thus to make as many willing buyers into actual buyers
as possible. But at the same time that the seller is
trying to open the channel to willing buyers.
The seller must also try to close the same channel to thieves or people we'll
call free riders, who would if they could reach into the channel of exchange and
extract the value of the goods that are being moved from seller to buyer.
In the channel of exchange, and take that value without paying the seller for the
goods. So, in order to fend off the free riders,
our seller must cultivate in the case of the free riders or the thief.
The same sort of transactions cost that the seller is trying to reduce in the
case of willing buyers. So, if free riders find it easy to reach
into the channel of exchange and to take the value of the good being traded
without compensating the seller. Then the seller won't be able to earn
money from that sort of, of theft and if the theft becomes widespread, the seller
won't be able to sell to anyone. The problem arises frequently, that
opening the channel of exchange to willing buyers, also opens it to free
riders. And closing the channel to free riders
also has the effect of closing it to willing buyers.
So, sellers must solve both of these problems in order to be successful
sellers of of goods. Let's talk a little bit about opening the
channel to buyers, although this is a problem that we've seen before.
Sellers try to lower the transactions costs that separate them from willing
buyers, below the gains from trade. And if they succeed in doing this, and
buyers discover that the transactions costs of buying that they bear are
smaller than the benefits of the purchase that they will make, they will purchase
the good. And that means success for the seller,
lowering these transaction costs means more sales and success for the seller.
An example of this, happens in every grocery store in the United States, its
possible to sell apples without having people touch them but its not easy to do
so. Most people, when they're in a store,
want to find out whether the apple they're going to buy is crisp, whether it
has any bruises in it or whether alternatively it's sort or mealy so that
they'll purchase the crisp unbruised one. In order to determine what apple is
bruised or not bruised customers typically have to pick up the apple and
inspect it by hand, by squeezing it. And if they do so, in the nature of
things, let's say 5% of the apples that they squeeze will then become unsalable
because the customers have squeezed the value out.
Perhaps, the customer squeezes the apple so hard that the skin breaks.
Perhaps, she drops the apple onto the floor.
In any case, the act of attempting to find out the quality of the apple has led
to the destruction or unsaleability of the apple.
And the lost revenue of those apples that have been, that have been destroyed by
the attempt of, of customers to discover the quality of the apple.
That value is a transactions cost to the seller.
I have a friend here in Middleton who runs a small fruit and vegetable shop
with a very, very strong reputation for very high quality.
And he will not allow customers to touch, any of the fruits or vegetables in his
store. So, that he can avoid the transactions
cost that I've just described. But then how do people discover whether
the fruit is good or not? My friend, Ted, tells them whether it's
good or not. And his reputation is such, that his
customers trust him implicitly. And thus, by building a strong reputation
for extremely high quality over many, many years, my friend Ted's been able to
reduce the transactions cost of the squeezing the fruit, and thereby make
more sales, than his counterparts in the larger supermarkets are able to make.