Complete information means all participants in a transaction know all relevant details. For example, in perfect competition, both buyers and sellers know about the availability of alternative products, product prices, the number of competitors, and the quality of the products. However, in real markets, the participants usually have different levels of information, which leads to a market environment of asymmetric information.
Asymmetric information occurs when one party in a market transaction has more information than the other. This imbalance can affect decision-making and cause market inefficiencies.
An Example of Asymmetric Situation
A classic example of asymmetric information is found in the used car market. Sellers generally have more comprehensive knowledge about the vehicle’s condition than potential buyers. Sellers know that car owners may hide undesirable information about the car’s accident history, and repair quality. Knowing this, used car buyers are only willing to offer lower prices for all used cars, including those cars that are of high quality. This means all used car owners will receive lower prices for their cars regardless of quality.
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