The Exchange of Variable-quality Commodities
Abstract: This paper explores the effects of variability in commodity quality. Pricing and selling specimens individually is usually too expensive. Sellers may effect the choosing, but the cost of creating the needed trust is usually too high. So sellers may let buyers pick and choose. The analysis of the “pick and choose” determines commodities’ equilibrium set of prices. However, sellers first sort commodities and then adopt a number of arrangements to reduce their losses from buyers’ picking and choosing. Methods adopted to lower the cost of dealing with variability include: 1. Guaranteeing. 2 Bundling. 3. Making buyers more uniform. 4. Exchanging costly-to-measure services via the wage contract, which substitutes for measuring service output. 5. Measuring wageworkers’ effort that also substitutes for measuring goods. The last two methods explain why workers are placed in firms that may be vertically or horizontally integrated, thus contributing to the theory of the firm.
