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Economics of Markets and Organizations (Fach) / Information asymmetry (Lektion)
Week 6
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- Information asymmetrie - Main Problems How can banks avoid risky borrowers? How can insurers identify risky clients? How to choose the right employee? How to find a good restaurant in an unknown city? How to pick a reliable seller on ebay?
- The adverse selection problem The market outcome is inefficient Incomplete information on the characteristics of the informed party Uninformed party selects the wrong kind of trading partner The lemons problem
- Moral hazard Incomplete information on the performance of the informed party
- How to prevent adverse selection? Government intervention Lemon laws Duty to disclose Quality regulation Market solutions Screening Signaling
- Screening - Examples Insurance Risk Job assessments Probation (fixed term contracts) Performance Pay
- Signaling - Examples credentials (= Qualifikationen): university degrees Advertising
- Auctions Information asymmetry for new or unique products Buyers know more about value than seller (Unique works of art, Google Ads, Wireless Spectrum) Solution: auctions Competition between bidders determines the price
- Auctions - different types First-price sealed-bid auction (one sealed bid) Dutch auction (decending price) English auction (increasing price) Second-price sealed-bid auction (highest bidder pays second highest bid) In theory, all four auction types lead to same revenue for the seller
- Spectrum auctions Telecommunications companies know more about value of licenses than the government English auction: bidders drop out at their own valuation and winner pays second-highest valuation
- Price discrimination - First Degree Definition: Same good, different price First-degree price discrimination Each consumer may pay a different price A.k.a.: personalized pricing Extreme case: perfect price discrimination Conditions: The firm can observe each consumer’s demand The firm has market power Arbitrage is difficult Outcome: The firm caters to each consumer willing to pay more than MC for its good No welfare loss CS = 0
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- Price discrimination - Third degree Different groups pay a different price A.k.a.: Group pricing Conditions The firm can distinguish between groups The firm has market power Arbitrage is difficult Profit maximizing strategy L = (p - MC) / p = 1/E E = Elasticity Outcome: The firm is better off The consumers may be better off or worse off Welfare decreases if the total quantity sold remains the same Welfare can increase if the firm caters to more markets
- Price discrimination - Second Degree A.k.a.: Menu pricing The menu serves as a screening device Consumer self-selection The price depends on what the consumer buys Conditions The firm has market power Arbitrage is difficult Profit maximizing strategy Unitprice :𝑝 < 𝑝𝑚;𝑝 > 𝑀𝐶 Outcome (compared to uniform price) Welfare increases (𝑝 < 𝑝𝑚) PS increases
- Quality discrimination The price depends on the quality of the good The firm offers different quality levels at different prices Welfare effects (compared to one quality level) PS increases CS ‘low’ segment increases CS ‘high’ segment often increases as well