1. Creating Value Through Selling
1.3 Reading: Economist (2016) “Secrets and Agents”
This reading builds on the Pink reading to describe Akerlof’s Nobel prize-winning theory of market failure under asymmetric information in more detail. It also discusses other research that built on this theory to create the branch of economics known as information economics. A basic understanding of key principles of information economics is very helpful for understanding marketing and sales strategies across our ever-increasingly digital world.
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Click here to access a copy of this article (requires UConn NetID)Remember that the used car market is used as an illustration of the problem only, As Akerlof himself notes in his original paper, it was chosen for “it’s concreteness and ease of understanding rather than its importance or realism” |
Comprehension Questions
- Can you explain the logic of Akerlof’s theory? Why do the buyers and sellers react to each other the way they do? Why is market failure the result?
- How does credible signaling solve the information asymmetry problem?
- What is required for a credible signal?
- How does screening solve the information asymmetry problem?
- What is required for a credible screen?
- In markets with imperfect information, why are market-efficient prices higher than marginal costs?
Optionally…
- Here is the link to the article on the Economist site (requires an Economist account).
- If you are interested, here is a link to Akerlof’s original 1970 paper (requires UConn NetID)
- Fun fact: George Akerlof is married to Treasury Secretary Janet Yellen