What Are Information Costs?

Information costs are costs incurred by an individual or a firm while amassing information to help make a financial decision. If these costs are significant enough, it can affect the profitability of a business enterprise or the soundness of a consumer’s purchase. For that reason, firms and consumers must consider information costs to be part of the marginal costs that they accrue each time that they make a decision. Examples of these costs, which are also known as search costs, include an individual hiring a financial planner to help with investments or a business hiring a consulting firm to help with some aspect of their operations.

In the business world, making the right decisions can make the difference between becoming a titan of industry and ending up on the corporate scrap heap. For this reason, businesses must make sure to perform due diligence each time they embark upon a possible initiative. Along the same lines, individual consumers must take care to amass as much information as possible when making a big purchase or choosing to invest their money. All of this effort to make the right choice can result in significant information costs.

Many information costs are tangible and easy to measure. Consulting firms are used by many big corporations who wish to have the firms’ expertise at their disposal whenever choices have to be made. People that hire financial planners are essentially paying for information to which they might not be privy otherwise. These costs must be considered whenever they arise.

There are other types of information costs which are harder to spot but can be just as significant. For example, time spent on amassing information can be costly in its own way, even if it doesn’t have a concrete monetary value attached. If a firm takes too much time making a decision, the value of a possible choice may dwindle in the interim or another firm could step in and grab the opportunity. Since this is the case, too much gathering of information can actually be harmful at times.

That is not to say that firms or consumers shouldn’t gather information when making decision. The key is to find valuable information. If the information is valuable enough, it is worthwhile to pay for it. Attempting to measure information costs in the same manner as any other measurable costs is somewhat difficult, but it is a process that decision-makers should undertake.