Information and Value Creation

The agent with more information always benefits.

Quality can be observable or unobservable. When quality is observable, each high quality and low quality is sold for the desired amount by the suppliers.

But when quality is unobservable, the market price and the expected value to the customer becomes mismatched.

Expected value to customer Qh/(Qh+Ql)*Ph + Ql/(Qh+Ql)*Pl

Always substitute value into above. The equation above is what you will come back to always.

When information is not perfect, there is a deadweight loss always. There is a limit to which the suppliers of high and low will supply. If the market price/equilibrium price does not match the actual value of the products, less or more will be supplied.

The deadweight loss is calculated by deltaQ*deltaP*1/2. deltaQ is the difference between the quantity supplied if the price equals the true value minus the quantity actually supplied. deltaP is the difference between the desired price and the actual market price. Also known as market inefficiency and market failure.

There is such thing as signalling to reduce market information asymmetry. Sellers try to make it known about their products more through advertising, warranties, returns etc. This is a costly action so as to prevent undervaluing of their products through imperfect information. Firms can also have a good reputation of quality through various means one of them being branding. User generated reviews are another example of trying to solve imperfect information.