In class last week, we discussed the idea of market failures, when certain forces intrude on the market to bring about inefficiency. One of the failures I found particularly interesting was asymmetrical information. Asymmetrical information is a market failure that results when one party in the exchange knows more information than the other party.
We learned that used cars sales are almost always an exchange where asymmetrical information occurs. This really made me think about last year when my boyfriend and I were in a car accident, and he only had $5,000 to get another car. We looked around and visited used car sellers for weeks, and every car we looked at was of course in "perfect" condition according to the car salesman. We would even test drive some cars that had obvious problems running, yet the car salesmen never thought it was that much of a problem. We eventually did find a car, which only need minor changes. My other friend, on the other hand, was not so lucky. He bought a newer used sports car which was really nice for $15,000, which according to Carfax had only been in one minor fender bender. A year later when my friend needed money and went to resell the car back, he learned that the car actually had permanent frame damage from the car accident and was basically worthless. So even Carfax doesn’t always reveal the true condition of a car.
I do agree that when buying a used car, it’s almost guaranteed you will know a lot less than the salesman, and you’re lucky if he tells you the truth. This got me thinking even more, there are a lot of situations where this occurs! Accountants, financial advisors, and assistants can also know information that others are unaware of. Even today, I went to the Flea Market to buy a knockoff purse, and one of the peddlers kept trying to overcharge and convince me that one of the bags was real Prada, I thought she was full of it. I then realized, I knew nothing about where these bags came from, if they were stolen, real, fake, or how much they were actually worth and there was no way this lady was going to tell me! I did buy one, by no means do I think it was real, but I do know I may have been a victim of asymmetrical information today!
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Asymmetrical information is part of selling any goods or services.
ReplyDeleteI work as a customer service representative for a marketing company that owns a couple of websites. many of those interested in joining the site come to me and ask particular questions about how successful the site is. When I answer this question, I tend to give examples and references to certain members who had great success on the site, but I fail to mention that there is no guarantee for success because I know that the person interested may pull back and not join the site. I answer questions diplomatically in order to increase sales in memberships.