Asymmetric Information

1
Asymmetric Information

• Asymmetric Information is when parties are not
  equally informed.
• For instance, with the sale of a good, the seller
  may know the value better than the buyer.
• In the classroom experiment, the seller
  (computer) knows how much it is worth, the buyer
  (student) does not.
• The seller is more willing to sell the car if the
  value is lower than if the value is higher.
• Thus, for a given price, a buyer is more likely
  to attract sellers with lower quality goods.

2
Buyer-Seller Example

• Value for the seller has an equal chance of being
  any number between 0 and 100.
• What is the average value?
• 50.
• If the buyer offers a price of 50, for which
  values will the seller sell?
• Values 0 to 50.
• What is the average of these values? What is 3/2
  times the average of these values?
• Average 25. This times 3/2 is 37.5.

3
General Solution.

• If the buyer offers a price of p, for which
  values will the seller sell.
• 0 to p.
• What is 3/2 times the average of these values?
• Average is p/2 . This times 3/2 is (3/4) p.
• On average, how much will the buyer make if he
  values the object 3/2 times the seller. What
  should the buyer do?
• 3/2 p/2 p3/4 p p -p/4. Set p0.
• Moral of the story Sometimes a best deal is one
  not made.

4
Applications

• Akelof recognized this problem in that used cars
  tend to be lemons.
• That is the seller knows more about the condition
  than the buyer.
• This is one reason why as soon as one leaves the
  dealer with a new car it has a significant drop
  in value.

5
More applicationsTakeovers

• Why do takeovers rarely benefit the companies?
• Often the target can benefit from the advantage
  of the other company management, size, bringing
  products to market.
• Case study Chromatis.
• Founded by Israelis in 1998. Sold to Lucent in
  2000 for 4.8 billion.
• Revenue generated for Lucent
• 0.
• Lucent closed Chromatis in 2001.
• Shortly after for financial reasons Lucent also
  for the most part dismantled Bell Labs.
• Where the transistor, laser, Unix, C, etc. was
  developed. 6 Nobel prizes for work..

6
Homework Question

• In the takeover game, assume that the value for
  the seller is uniformly distributed between 50
  and 100.
• Assume that it is still worth to the buyer 3/2
  times the sellers value.
• What should the buyer offer to the seller?