Industrial Organization PGDMM501

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Industrial Organization PGDMM501

• Lecture 8 Information

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Reasons for information limitations

• Reliability varies with
• Time
• Source
• Cost of collection prevents all information from
  being collected
• Bounded Rationality power to remember and recall
  are limited
• Processing cost
• Insufficient education or training to process
  information

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Asymmetric information

• All of the above reasons lead to asymmetric
  information
• Moral hazard
• Adverse selection
• Asymmetric information on
• Quality
• Price

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Information on quality

• The lemons problem of Akerlof
• Bad products drive out the good
• Adverse selection (this is an exante problem)
• Only the bad cars are sold
• Only the sick apply for life insurance

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Solving adverse selection

• Guarantees/warranties
• Reputation
• Third party expert knowledge
• Standards and certificates

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Information on pricing

• Limitations here can lead to downward sloping
  demand curves
• The tourist trap model
• Fixed number of sellers
• Firms can increase prices by ? lt c
• Until they reach monopoly prices
• Free entry
• Will enter until a monopolistically competitive
  price is achieved where no economic profits are
  available

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Information on pricing

• The tourist and native model
• Multi price equilibrium or single price at
  marginal cost (PMC)
• As more consumers become informed (native) the
  market share of low-priced firms increase