Markets with Asymmetric InformationPresented by Jiajie Xu(Majoring in mathematical economics, Class 2011)2014/10/17

Agenda Introduction

An example: The Market for Used Cars

Implications of Asymmetric Information

Possible solutions

Introduction Asymmetric information

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.

When some economic participants have better information than others, markets may fail to allocate goods efficiently or may not even exist.

An example: The Market for Used Cars (1/4) Types of used cars:

high-quality cars low-quality cars.

Market price : 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

high-quality 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

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

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 low-quality product and too little of the high-quality product are sold.

Solutions to asymmetric information

Maket signaling

Eg. Certificates/ product illustration

Reputation Eg. Comments given by previous consumers

Third party and regulations Eg. The functions of Ali Pay

Process by which sellers send signals to buyers conveying information about product quality.

Markets with Asymmetric InformationPresented by Jiajie Xu(Majoring in mathematical economics, Class 2011)2014/10/17

Thanks for listening!