eep2011_lecture_2 - MarketFailureswith AsymmetricInformation

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Market Failures with  Asymmetric Information
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Asymmetric Information: A situation in  which one party in a transaction has  more or superior information compared to  another.
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Asymmetric Information Some parties know more than others:  a patient does not know if a particular surgery will  significantly improve his/her quality of life. A seller of a product knows more about its quality than  the buyer does.  Workers usually know their own skills and abilities  better than employers.  Business managers know more about their firms’ costs,  competitive positions, and investment opportunities  than do the firms’ owners.
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To circumvent information  asymmetry A client can hire a knowledgeable professional, e.g. a  private family practitioner, to accompany the person to  the clinic and advise. An health insurance company can open its own health  check up clinic. But these actions are very costly, may not be cost- effective!
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Hansmann argues that the need for trust by clients with  insufficient information has caused evolving  Not For  Profit (NFP)  firms or Public sector firms. There is a constraint for these firms: they cannot  distribute their nets. This is called 
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This note was uploaded on 03/03/2011 for the course MARKETING 101 taught by Professor Singh during the Spring '11 term at Management Development Institute.

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eep2011_lecture_2 - MarketFailureswith AsymmetricInformation

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