Asymmetric discrimination
3 important questions on Asymmetric discrimination
What is Asymmetric discrimination and what can it lead to?
Asymmetric information: means that one party of a transaction knows a material fact the other party doesn't know. This can be exploited by the more informed party and thus results in opportunistic behavior and this will lead to market failure.
Their are 2 forms of opportunistic behavior, name them and explain how they cause market failure.
Adverse selection: This is an informed person taking advantage of a less informed person that doesn't know about an unobserved characteristic of the informed person.-> market failure: reducing size of the market or eliminating the market. Because the uninformed now has to ask higher price or not engage in the transaction at all.
Moral hazard: Informed person taking advantage of a less informed person through an unobserved action. (more risk taking actions when insured)
Whant conditions does a firm have to meet to price discriminate successfully?
- A firm needs market power
- Consumers must differ in price elasticity, and firm must be able to identify this.
- Consumer has to prevent/ limit resale form people that paid low price to people the are willing to pay allot.
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