Asymmetric Information

Asymmetric information is a situation in which there exists a gap between the amount and quality of information some people have compared to others. One such situation occurs during the bargaining phase of a car purchase. The car dealer has typically has more information such as how much was paid by the dealer for the car, the results of a mechanical inspection, what the local market is likely to pay for such a car in this condition, et cetera. This is asymmetric information as the dealer has more and better information than the customer.

This information gap can affect companies in many ways. A company knows the quality of the product it is producing. Suppose there are two companies, one of which is producing and extremely high quality product and a competitor who makes a similar product but of lower quality. Now suppose both firms advertise their products as being of high quality. The consumers do not have as good of information as the company and therefore will be leery of the companies' claims to begin with. As such the sales of the company which is actually producing a high quality good will probably be less than what they would be had the gap in information not existed.


1. Asymmetric information does not occur in which of the following situations:
(A) During college recruiting.
(B) During a house sale.
(C) During salary negotiations when being hired by a large corporation.
(D) During car price bargaining.
(E) None of the above.


#1 Answer: E. None of the above.
The answer is E because assymmetric information occurs in all the situations.
During college recruiting the college knows more about the quality of the education than the prospective students do.
During a house sale, the seller knows more about the house's history and problems than the potential buyer.
During salary negotiations the prospective employee knows what she will accept as a salary and the employer knows how much they can offer.
During car price bargaining the dealer knows a lot more about the car than the potential buyer.