Asymmetric Information

Asymmetric information signifies a situation in which one party involved in a transaction with another, has more or superior knowledge and information than the other.

This is often the case between buyer and seller, where the seller has more knowledge than a buyer. However, the opposite condition can also happen at times. The situation can potentially be harmful as the party with more information can take advantage of other’s lack of knowledge and thereby exploit the other party.

Asymmetric information is the source of two major problems such as the following:

• Moral Hazard – This reflects on the immoral behaviour of a party with asymmetric information subsequent to a transaction. For example, some people commit arson purposely to reap benefits from fire insurance.
• Adverse Selection – In this case, the party displays immoral behaviour by taking advantage of the knowledge or asymmetric information prior to the transaction. For example, some people secure life insurance although aware of languishing health.

Buyer’s Narket

A buyers market is a market where the number of sellers exceeds the number of buyers. One inevitable implication of asymmetric information in a buyer’s market is lowering of prices. This happens as supply is more than demand. A Buyer’s market is also known as a soft market.

Seller’s Market

Seller’s market is an economic situation where the demand for goods and services is high but the supply of the same is on a lower side. In the case of a seller’s market, asymmetric information results in increasing prices. In seller’s markets, sellers fix prices of goods and services with the aim of gaining maximum possible returns. Seller’s market is also known as a hard market.

Conference Call

A companies conference call is used by business establishments to inform investors about various aspects of their investment products and services or other aspects of the overall condition of the company. Asymmetric information in conference calls leads to investors being misled and incurring losses.

Insider Information

Insider information is basically practical information about a particular company. Normally such information is not provided to the public. Insider information is related to asymmetric information as it is held back by companies and allows companies to provide asymmetric information to investors.

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