What Happens in market When Information Is Imperfect?

  • CONSTANTIA PALA

Introduction:

In the analysis of competitive marketplaces it is often assumed that consumers and providers have perfect market information after which to make their economical decisions. That is known as symmetric information, where consumers and makers have perfect and identical market information on a good or service. Assuming that consumers and companies act in a realistic way, it will lead to an efficient allocation of resources. (Gavin 2008). However, in reality, consumers and producers have imperfect and unequal market knowledge after which to make their economic decisions which may lead to a misallocation of resources. The three competitive market models (monopolistic competition, oligopoly and monopoly) definitely have characteristics which prove that information in these market segments is imperfect or asymmetric. For instance, it can be argued that in a market in which a monopoly is accessible, the consumers and new firms which desire to enter the market, have imperfect knowledge about the monopoly's rates and result strategies.

Main Body
Information failure

Some examples of information failure can be induced by inaccurate, misleading or complex information. For instance, if you are purchasing a car or truck, you know less about any problems the car may have, than the person selling it. Hence, after a brief usage period the automobile might go wrong credited to a complex problem you could have known if information were symmetric. Furthermore, when a firm hires a fresh employee, that worker may have a much better idea about his / her capacity than the firm. (Morgan, W. , Katz, M. and Rosen, H. , 2006). The organization on the other hand can underestimate or overestimate the employee's skills and this might have an impact on his salary. Whenever one area of the market has better information than the other, the asymmetric information concern arises. Furthermore, dependency is one of the primary types of information failing. Nowadays, technology is becoming increasingly more present in the consumers lives. The ratio of people which are enthusiastic about certain goods is a lot larger than it was ten to fifteen years back. An extremely recent example is the discharge of the new iPhone 6. Hundreds of individuals were standing in long queues to purchase the new apple product. (Williams, R. , 2014) As researches have shown almost all of the people ready in line weren't aware of the functions of the new mobile phone and didn't even desire a new phone since they had purchased the prior iPhone model which was released a year ago.

Also, another exemplory case of imperfect information can be created by misunderstanding the true costs or advantages of a product. For instance, insurance companies do not know much about potential buyers' health problems. People with increased hidden health problems are much more likely to purchase health insurance than other folks and the price tag on health insurance reflects the price of a sicker-than- person with average skills. As a consequence, people in average health may be discouraged from purchasing medical health insurance by the high prices placed by the insurance firms. (Mankiw, N. G. and Taylor, M. P, 2014). Finally, imperfect information can be credited to ignorance. If the marketplace participant appreciates that better information can be found, information becomes another need or want. Information may be obtained through an financial exchange and becomes a ownership that is clearly a cost to the buyer or owner. Useful information is obtainable as market product in forms like books, media broadcasts, and consulting services. (Stengel, D. N. , 2012)

Stock and financial market segments

Moreover, imperfect information can be also seen in the stock and financial markets. Financial marketplaces and specifically stock markets is one of the marketplaces where the expectation of availability of full information for all members is ignored so that the situation causes establishing the marketplace pushes. The role of information has been ignored in these models. The main role of the balance of information to all or any individuals is the fact it ignores the theoretical behaviours in rational interpersonal learning, which can improve the individual behaviour in steps of making decisions. For rational cultural learning market, members can analyze two types of information in their decisions. The first one, is the general information which is open to all individuals and the next one is personal information, with personal signs which is merely open to certain people. (Mahmoodzadeh, M. , Ghavidel, S. , and Mousavi, M. H. , 2014).

Labour, foreign exchange markets

Asymmetric information in the labour market is a situation where employers do not know the future output of the new employees. In addition, migrant labour definitely has asymmetric information since in some instances, they are being employed under illegitimate conditions. They don't have enough information and knowledge about the employment laws of every country and as a result, they might be underpaid or overworking than the common labour of that country, or for less overall than the national minimum wage.

Demand and offer markets:

In the demand and offer markets, the only real market that involves both the companies and the consumers having perfect knowledge on the product and the market is perfect competition. This market has very low barriers to entry and leave and hence providers think it is cheap and easy to pop in or from the market. This means that the organization has access to this information by including the latest main exemplory case of perfect competition is the marketplace for fruit and vegetables. Anyone can sell and expand his own garden and every veg seller provides his goods on relatively the same prices as everyone else. A monopolistic competition can be in comparison to a perfect competition in terms of obstacles to entry. In the forex market, the obstacles to entry and exit are relatively low. However, when it comes to imperfect information, the knowledge upon this market is broadly spread between participants, so it is improbable to be perfect. This is inferred from the eating industry. Before going to a restaurant, consumers can get different views and read different reviews about the menus and the restaurant generally speaking before making their final decision. Furthermore, each firm makes impartial decisions about prices, result which are based on its product, its market and its costs of development. Finally, there are usually a huge number of unbiased firms competing in the market. (Economics Online, 2013). Overall, information in the perfect competition market is assumed to be symmetric while information in the monopolistic competition is assumed to be relatively imperfect.

To continue with, oligopolies and monopolies are the primary types of competition in the demand and supply market where information is asymmetric. Both of these types of competition can maintain their position of supremacy because of the high obstacles to entry and exit. A monopoly is present when there is only one big company in the industry. But whether a business can be classed as a monopoly is not always clear. This will depend how narrowly the industry is defined. For example, a textile company may have a monopoly on certain types of textile, but it generally does not have a monopoly on fabric in general. The buyer can buy materials apart from those supplied by the company. (Sloman, 2008). Moreover, monopoly has imperfect knowledge and the monopolist may learn than the buyer and can exploit this knowledge to its own benefits. Also, prices are higher and amount is leaner under monopoly in comparison to perfect and monopolistic competition.

Figure 1: A monopoly market framework (Economics online, 2013)

As it can be inferred from Shape 1, the monopolist makes supernormal earnings (PABC) at the trouble of the buyer surplus. The consumer pays a higher price (P) than the purchase price he would have paid if he previously perfect understanding of the product and the marketplace in general. We are able to also say that this is one of the primary reasons that the federal government monitors and handles the development of monopolies on the market.

As mentioned previously, the same asymmetric information is available in an oligopolistic market. Oligopoly is market which has a few sellers providing many potential buyers. Each owner recognises that prices can be controlled to a certain degree and that rivals' activities will influence income. Therefore, oligopoly has imperfect information about rival firms' price and end result decisions. For instance, major airlines like British Airways and Air France operate their routes with only a few close opponents. With only a few organizations in oligopoly dominating an industry, there is a high concentration ratio firms within an oligopoly tend to avoid price competition; oligopoly market is also characterised by non-price competition. (Sloman, 2005).

The behaviour of oligopolies can be evaluated using the Game Theory. It is a method utilized by economists to look at strategic connection of markets. Each firm within an oligopoly should consider how its decision might influence the development decisions of all other firms. (Mankiw, N. G. and Taylor, M. P, 2014). Asymmetric information can even be analysed with game theory. For instance, when deciding whether to slice or increase prices, firms will be uncertain about how precisely their competitors will act and react. They have to make decisions whilst looking to second estimate how other companies will reply. A symmetric game is a game where the payoffs for participating in a particular strategy depend only on the other strategies applied, not on who's playing them. If the identities of the players can be billed without charging the payoff to the strategies, means that the game is symmetric. However, asymmetric games are game titles where there are not equal strategy sets for both players. It is possible, for a game to have equivalent strategies for both players, yet be asymmetric.

Conclusion

To conclude, imperfect information can be seen in the demand and supply market, labour market and financial and stock market segments. Markets might not exactly provide enough information because, throughout a market transfer it might not be in the interests of one party to provide full information to the other get together and because of this market with imperfect information brings about a market failing. Firms in every three competitive market segments have 'market power', this means they face a downward-sloping demand curve, therefore can choose the price tag on their product alternatively than simply admit a 'market price' like the correctly competitive company. (Hill, R. and Myatt, T. , 2010).

References

Economics Online, 2013, Monopoly. [image online] Available at: http://www. economicsonline. co. uk/Business_economics/Monopoly. html [Reached on: 12/10/2014]

Gavin, M. G. , 2008, Economics: Competitive Markets: THAT THEY Work and Why They Fail. Oxfordshire: Philip Allan Changes.

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