Asymmetric Information

In the Markets and Information chapter that we read for class on Monday, the topic of asymmetric information between buyers and sellers was mentioned.  This is a case where one party knows more about the product being sold than the other.  This can cause an unfair advantage for one of the people involved, which results in someone paying too much for a good or receiving too little in exchange for a good. 

The internet makes it very easy for sellers to hide information about a particular product because the buyer is not physically able to see it and judge for themselves its true value.  Certain websites like Amazon and eBay try to prevent buyers from getting scammed by setting up safeguards such as ratings systems.  Products are rated by a seller on a scale of bad to brand new condition with intermediate steps such as used, good, and like new.  However this system also has its flaws.  One person’s definition of “Like New” could be very different than someone else’s.  If you bought a book in good condition, you would not want pages missing or scribbles on the page but occasionally that is exactly what you will get.

A few years ago, my dad turned to eBay to sell hundreds of old baseball cards that had been sitting in my grandfather’s attic.  Most of these cards were in very good condition and my dad wanted to get a fair price for them.  Instead of trusting the qualitative scale that eBay provides, he sent the cards to an official site to have them evaluated and ranked.  This store had a numerical ranking system based on dozens of different aspects of the card.  Each card was looked at individually given a quantitative number.

With those numbers, my dad was able to market the cards to avid baseball collectors.  The buyers knew that the baseball cards were in a legitimately good condition which increased the likelihood that they would spend money purchasing them.  In this case, the asymmetric information was eliminated making both the buyer and the seller more likely to exchange goods.