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Information asymmetry

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Information asymmetry (IA) is an arcane topic of economics terminology. According to most economics texts, it seems to refer to economic situations in which suppliers (sellers) know things which demanders (purchasers) do not. In such a case, what the demanders don't know can definitely hurt them, but also can fail to hurt them. Informationally, sales transactions (from the buyer's POV) are in effect a type of (nonlethal, of course) "Russian Roulette," as it's mistakenly called.

In practice, in asymmetric markets, buyers do not know until they get home whether they have bought a "dud." For this reason, asymmetric goods are goods of highly variable quality. Not all such goods are asymmetric, however. If the reason for the variability in quality is technological (i.e. insufficient quality control technologies are available) you have a "dud prone" product, but not necessarily an asymmetric one. Examples of such products might include fireworks, or (photographic) flashbulbs (or flash powder for the old school). In general, if there is no method of non-destructive testing (NDT), the seller is as much in the dark as the buyer as to which are the duds. On the other hand, a product which is sometimes visibly defective, but sold in a (non-transparent, of course) package, is potentially asymmetric. Packaging is not the only creator of informational asymmetry in economics. Used cars are the most commonly cited example in textbooks of IA goods. (with consequences not necessarily nonlethal, BTW) A reseller of used cars, has acquired the car from somewhere. That somewhere could be a parts remanufacturing facility, rental company used car lot, police auction, or financial sector auction (repo man). Different sources of used cars may have a different known statistical frequencies of producing "duds," (or "lemans," in autospeak). Yet there seems to be no law requiring detailed and complete "chain of custody" information at the point of sale. Even when there is a law, there are often technological fixes, such as odometer tampering.

Information asymmetry can be dealt with technologically. The usual venue for this is the Web, and a fairly generic term for the concept is shop bot. Famous examples of shop bots include hotels.com, carfax.com, coolsavings.com, priceline.com, blah blah blah blah blah. An example of a shop bot in (primarily?) non-internet media is the infomercial-based Direct Buy. The central question is whether a de-facto shop bot (in terms of informational capability) can be successfully implemented on a nonproprietary information model. Icing on the cake would be also doing it in the nonprophet sector.

see http://web.archive.org/20091027073622/geocities.com/n8chz/as.htm

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