Transcript Markets with Asymmetric Information

Markets with
Asymmetric
Information
Presented by Jiajie Xu
(Majoring in mathematical
economics, Class 2011)
2014/10/17
Agenda
 Introduction
 An
example: The Market for Used Cars
 Implications
 Possible
of Asymmetric Information
solutions
Introduction

Asymmetric information
When some economic participants have better
information than others, markets may fail to allocate
goods efficiently or may not even exist.

An important issue to be discussed in economic studies:
The Nobel Price in Economic Sciences 1982, 1996, 2001,
2007are all related to the economics of information.
An example: The Market for Used Cars (1/4)

Types of used cars:



Market price :




high-quality cars
low-quality cars.
high-quality cars is
$10,000
low-quality cars $5000
50,000 cars of each type
are sold.
Information:

the seller knows much
more about its quality
than a buyer does.
An example: The Market for Used Cars (2/4)
High quality market:
 1. the demand curve for highquality cars is DH

2. buyers lower their
expectations about the
average quality, demand
shifts to DM

3. quantity of high-quality cars
sold falls from 50,000 to 25,000,
buyers with higher quality
demand exit the market
An example: The Market for Used Cars (3/4)
Low quality market:
 1. the demand curve for
low-quality cars is DL

2. buyers raise their
expectations about the
average quality, demand
shifts to DM

3. quantity of low-quality
cars sold falls from 50,000 to
75,000
An example: The Market for Used Cars (4/4)



4. consumers begin to realize most cars sold are low quality
-> their perceived demand shifts to DLM
-> on average, cars are thought to be of low to medium quality
5. The shifting continues until only low-quality cars are sold.
6. The market of high quality cars fails.
Implications of Asymmetric Information

Adverse selection
Form of market failure resulting when products of
different qualities are sold at a single price because of
asymmetric information, so that too much of the lowquality product and too little of the high-quality
product are sold.

Eg. the market for health insurance




Firms can’t determine the health conditions of their client and
charges the average price
Healthy people exit the market
Firms raise the price
Eg. the online market

Durable goods and luxury goods are sold much less than ordinary
commodities in the online market
Solutions to asymmetric information
 Maket
signaling
Process by which sellers send signals to
buyers conveying information about product quality.

Eg. Certificates/ product illustration
 Reputation

Eg. Comments given by previous consumers
 Third

party and regulations
Eg. The functions of Ali Pay
Thanks for listening!
Markets with
Asymmetric
Information
Presented by Jiajie Xu
(Majoring in mathematical
economics, Class 2011)
2014/10/17