The Economist Case Study
The May 12th, 2007 edition of London's The Economist magazine presented an interesting case demonstrating an increase in efficiency through better information. The case deals with sardine fisherman off the coast of India and the introduction of the cell phone in 1997.
Suppose a fisherman off the coast of India brings in an unusually good catch of sardines one day. Because it is likely that the other fisherman also did better than usual, our fisherman can expect a low price for his catch, if he can sell it at all. Our fisherman asks himself if he should try a market farther away where the fisherman may not have faired as well. However, if he makes the wrong choice, he may find that prices are equally as low and that he has wasted fuel in hopes of fetching a higher price. Further, the fish markets are only open for a few hours before dawn so there is not enough time to try multiple markets and because these market are farther away, our fisherman runs the risk of not making it to the market before it closes; if he does not make it before close, he will be forced to dump his catch into the sea as his product is perishable.
Before Cell Phones
The situation above is far from efficient for both the fisherman and the customers back at the docks. Because of the risk associated with trying a new market, research shows that fisherman typically stuck with their usual market. On average, five to eight percent of total catches went to waste. The Economist cites an example where 11 fisherman in Badagara, India were forced to throw away their catch while there were 27 buyers in a market 9 miles away that could not buy as much fish as they wanted. This informational inefficiency also created large variations in the price of sardines along the Indian Coast.
After Cell Phones
Fisherman found that they could use cell phones to call the nearby markets to gauge demand. Harvard economist Robert Jensen found that the portion of fisherman that went for other markets other than their home one increased from 0 to thirty-five percent. Further, Jensen found that very few fish were wasted and the variation in price fell. Also of note, the fisherman's profits rose eight percent while consumer prices fell 4 percent. So, we see a large increase in efficiency as a result of better information. Mr. Jensen said that "information makes markets work, and markets improve welfare".