Tag Archive | "Asymmetric Information; Adverse Selection"

High-Tech Products and the Double Adverse Selection: Does Commercial Distribution Worsen Efficiency?

We all know that information about products drives consumption choices. But knowledge comes first. Without the correct consciousness about products, even with complete information inefficient outcomes may result. The adverse selection problem is revisited in this paper, successfully interpreting what happens any time when, even if a contract is complete and the information about the good being sold known, consumers either do not know enough about the existence of some relevant characteristic of products, or do not fully understand their specifications. One can argue that intermediaries (e.g., shop- assistants) can solve the issue. But, unfortunately, this is not true. Intermediaries affect market mechanism, alter consumption experiences and can even create incentives for firms to cheat. This implies that high quality firms should quit commercial distribution to create self-owned mono brand dedicated shops, where assistants are educated (since they work directly for the producer), any asymmetry is equilibrated and the incentive to cheat for firms is ceased. The total social welfare will be increased and, in qualitative terms, consumers buy something that fits better their preferences.

  High-Tech Products and the Double Adverse Selection: Does Commercial Distribution Worsen Efficiency? (683.5 KiB, 1,494 hits)

Posted in Economics, Issue no. 7