Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- List of cases
- Preface
- Part I Getting started
- Part II Market power
- Part III Sources of market power
- Part IV Pricing strategies and market segmentation
- Part V Product quality and information
- 12 Asymmetric information, price and advertising signals
- 13 Marketing tools for experience goods
- Part VI Theory of competition policy
- Part VII R&D and intellectual property
- Part VIII Networks, standards and systems
- Part IX Market intermediation
- Appendices
- Index
12 - Asymmetric information, price and advertising signals
from Part V - Product quality and information
- Frontmatter
- Contents
- List of figures
- List of tables
- List of cases
- Preface
- Part I Getting started
- Part II Market power
- Part III Sources of market power
- Part IV Pricing strategies and market segmentation
- Part V Product quality and information
- 12 Asymmetric information, price and advertising signals
- 13 Marketing tools for experience goods
- Part VI Theory of competition policy
- Part VII R&D and intellectual property
- Part VIII Networks, standards and systems
- Part IX Market intermediation
- Appendices
- Index
Summary
A classic example of asymmetric information problems is the market for used cars. The current owner has private information about product characteristics whereas buyers only have a vague idea. This asymmetric information problem may result in the breakdown of the market: only lemons (i.e., used cars of a poor quality) may be offered for sale or, worse, all sellers may withdraw from the market. Alternatively, if sellers can disclose their information, asymmetric information may result in full information disclosure, so that the asymmetric information is solved. What is the likely outcome and why? This is what we explore in Section 12.1. We start by analysing hidden information problems, where firms do not control the quality of their product but observe the realization of quality, whereas consumers cannot observe quality before buying the product. We also examine hidden action problems that arise when firms are able to invest in the quality of their products; in that case, we explore the impact asymmetric information has on the private investment incentives.
When producers, like car manufacturers, are not able to credibly disclose some relevant information, they will try to use strategic variables to convince consumers that their products are of high quality. In Section 12.2, we focus on advertising and price signalling in a monopoly setting. Wasteful advertising and prices which are distorted away from their full information level may serve as a means to make consumers believe in high product quality.
- Type
- Chapter
- Information
- Industrial OrganizationMarkets and Strategies, pp. 285 - 308Publisher: Cambridge University PressPrint publication year: 2010