26-Information in Markets (I)

26-Information in Markets (I) - Agenda Course Overview...

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1 Agenda • Course Overview • Asymmetric Information in Markets • Adverse Selection: The Market for Lemons • Private and Public Remedies • Discussion Question: Used-car market • What To Take Away Microeconomics The Structure of the Course Consumers and Producers Market Interaction Today’s lecture Uncertainty Perfect competition Monopoly and Pricing strategies Competitive Strategy Auctions Information in Markets and Agency Game Theory Introduction to Markets Consumer Theory and Demand Technology and Production
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2 Agenda • Course Overview • Asymmetric Information in Markets • Adverse Selection: The Market for Lemons • Private and Public Remedies • Discussion Question: Used-car market • What To Take Away Asymmetric Information in Markets Thus far we have assumed that all market participants had access to the same information. However, in many situations market interactions occur under asymmetric information: each party may know more about some relevant parameters of a transaction. For example, a seller or producer knows more about the quality of the product than the buyer does Also, Managers know more about costs, competitive position and investment opportunities than firm owners How does the presence of asymmetric information affect the operation of markets?
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3 And the envelope goes to…. I have two envelopes. I put a $100 bill in one of them, close it, and then at random a tear to pieces one of the envelopes. First I offer to sell it to you. How much would you be willing to pay for it? Would I sell it? I can resist myself and before selling it to you I take a peek inside the envelope. How much would you offer for it? What would you think if I refuse your offer? If I accept it? Actually, this is pretty similar to the market for used cars: normally sellers know more about the state in which the car is, if it has been properly serviced, its accident history, etc… Note that for a given market price for used cars, sellers of poor quality cars are more eager to sell than sellers of good cars. This situation is normally referred to as “adverse selection”. The term originated in the insurance industry where individuals prone to accident are more willing to buy insurance than those less prone to an accident. As a result, by setting a high insurance premium, insurance company are “adversely selecting” only the accident prone drivers. Adverse Selection
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4 In many situations sellers are better off if they could credibly disclose the information they have. How to credibly signal that your car is of high quality? How to credibly signal that you are an skilled manager? How to credibly signal that you are a good driver? Buyers cannot rely simply on the sellers’ word (especially private sellers of
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26-Information in Markets (I) - Agenda Course Overview...

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