The end of information asymmetry (except when we want it)

Alex Tabarrok and Tyler Cowen of Marginal Revolution fame contemplate the implications of a diminishing information asymmetry.

Might the age of asymmetric information – for better or worse – be over?  Market institutions are rapidly evolving to a situation where very often the buyer and the seller have roughly equal knowledge. Technological developments are giving everyone who wants it access to the very best information when it comes to product quality, worker performance, matches to friends and partners, and the nature of financial transactions, among many other areas.

They begin with a great example of how a market increased liquidity by driving down information asymmetry.

The market for used cars, however, has been one of the earlier examples where market institutions largely (albeit not completely) solved the problem of asymmetric information. Even in 1970, the market for used cars was extensive, and some institutions existed to make information more symmetric. Perhaps the most important of these was the odometer. First used by Alexander the Great to measure distances between cities, modern odometers were standard on almost all cars by 1925. The odometer reading is the single most important piece of information about a specific car that determines its value, and that is why used car prices are adjusted for mileage. The law contributes to this solution by making odometer tampering illegal and successive state and federal laws have increased the penalties and enforcement over time. In 1972, for example, the Federal Odometer Act made tampering a federal felony. As with other crimes, punishment doesn’t eliminate tampering but it does reduce it quantity thus making odometer readings more trustworthy and quality information more symmetric. Even more importantly, the Truth in Mileage Act of 1986 requires that sellers disclose and record the odometer reading on the title at every transfer of title. The 1986 Act greatly reduced the benefits of tampering because the odometer could not be rolled back prior to the reading from a previously recorded sale.

Perhaps the most telling fact is that the market for used cars is already some three times larger than the market for new cars (as measured by unit sales, see Bureau of Transportation Statistics). In 2012, for example, there were 40.5 million used car sales compared to 14.5 million new car sales (NIDIA 2013). On average, used cars sell for about a third the price of new cars, so the total size of the two markets is similar with both around $330 billion in sales. There just aren’t that many lemons to sustain such a high transactions volume. In fact both high-quality and low-quality used cars are available in fairly liquid, fairly transparent markets.
Information symmetry about the quality of automobiles is very likely to increase. Almost all vehicles today have “event data recorders” aka “black boxes,” similar to those found in airplanes. Event data recorders record data on vehicle performance and diagnostic checks but also speed, braking, seatbelt use and other information relevant to safety and car crashes. Some car companies, most notably Tesla, can collect such information remotely or stream it in real time. Tesla, for example, collects information on a vehicle’s odometer, service history, speed, location, battery use, charging time, braking, starting and stopping times, air bag deployment—even radio and horn use.[2] When a vehicle is sold the data transfers with the vehicle. It is now possible to prove that a used car really was driven by a grandma just on Sundays.

Even for new car purchases, reduced information asymmetry has vastly improved the purchase process, and it might be just as good for car dealerships, too. It's now possible to look up the dealer price for most any car on a variety of free websites. Instead of haggling back and forth with a car salesman, traditionally an unpleasant ordeal, you can simply offer to purchase a car at cost plus whatever margin you want the dealer to make.

I suspect it's only a matter of time before other traditionally unpleasant or inefficient marketplaces become less one-sided. One example, to stay in the automotive space, is purchasing auto insurance. Every time my policy comes up for renewal, I'll check around for better rates, and more often than you'd expect I find one. The insurance companies count on your laziness to minimize churn, and often they withhold discounts they could offer you based on your driving record. Someone is going to come along to either automate that process or offer to take a cut of any savings in exchange for doing the legwork.

I recently purchased my first condo, and shopping for a mortgage was also incredibly painful. Refinancing doesn't sound like much fun either. This is one area where good enough doesn't feel good enough; one always feels taken advantage of if there's money left on the table.


Tabarrok and Cowen also discuss reduced information asymmetry in reputation in a variety of marketplaces.

Reputation is one very general way to think about solutions to moral hazard problems. A mechanic with a reputation for honest dealing can earn more business at a higher price. Cheating becomes less valuable when the price is a loss of reputation.
In recent times, information technology has made it easier to observe a seller’s reputation and to contribute to the formation of a seller’s reputation at low cost. Yelp, Angie’s List, and Amazon Reviews all make it easy for past buyers to report their observations on seller quality and for future buyers to observe a seller’s accumulated reputation. And of course it is not just sellers who are rated but workers too are evaluated in a variety of ways; for instance many employers check a worker’s credit rating, or on-line history, before making a hire. We may be creating some privacy problems with these techniques, but the old school issues of asymmetric information are drying up rapidly.
Early reputation mechanisms were one-way, namely that buyers would generate reputations for sellers, but now the ratings often go both ways. Many of the exchanges in the sharing economy, including Uber (transportation), Airbnb (accommodations), and Feastly (cooks) use two-way reputational systems. That is the customer rates the Uber driver, but in turn the Uber driver rates the customer. Dual reputation systems can support a remarkable amount of exchange even in the absence of law or regulation. The Silk Road marketplace for illegal goods, for example, supported millions of dollars of exchange through a dual reputation system. On the Silk Road it was possible to pay for goods in advance of delivery or to buy goods which were delivered before payment was made. In each case, honesty was maintained through reputation even without legal recourse for contract breach.[4] Thus, in these cases reputation maintained quality even when theories of information asymmetry would have predicted the problematic nature of any exchange at all.

Tabarrok and Cowen hone in on privacy as one problem with this world of two-way reputation. Privacy concerns and plain old cultural inertia may be the only things holding back more companies from implementing two-way reputation systems. Restaurants, hotels, airlines, car rental services, and almost anyone you transact with could start rating you as a customer and using that to determine whether they want your business in the future. Everyone deserves healthcare, I believe strongly in that, but maybe the jerk who always no-shows at a restaurant can and should live without a reservation.


Given all this, why do we still tolerate so much information asymmetry when it comes to the people in our lives? Take the mating/dating market, for example. People spend money on fancy sports cars, exorbitant prix fixe meals, designer clothing, much of it just to signify wealth. Why not just show someone your bank statement?

How about signaling physical fitness? We spend a lot on gym memberships, Spanx, fad diets, all to look good for potential mates, but why not share the results of our latest physical from the doctor's office, along with a medical history?

Of course many technological advances have already started increasing the efficiency of such status signaling (a cursory scroll through your Facebook news feed would blow the mind of a sociologist from a previous era), but we still tolerate a surprisingly high degree of information opacity if considered purely from a market perspective.

I suspect it's not just cultural inertia, though that plays a part as in all technology dissemination. Instead, I suspect humans value the process of constructing narratives about themselves and about each other, and reducing information opacity to zero would remove all the pleasures of that activity. It would eliminate mystery, and ambling out of the fog of mystery  is one of the great pleasures of life.

That so many of us choose to derive so much of the narrative drama of life through the people around us is either natural or bizarre, depending on your personality. Even with someone you know so well, like your partner or spouse or child, one of the most pleasurable mysteries of life is learning new things about them every day, seeing how they evolve. If we have an insatiable desire for a certain level of narrative entropy, perhaps most of us would prefer to have it from the people in our lives than from, say, a new digital SLR, where we want to read every last bit of research and every last professional and consumer review to ensure we know what we're getting.

Perhaps some baseline level of relationship dissolution will always exist simply because we prefer a gradual diminishment rather than a sudden dissolution of information asymmetry when it comes to the people in our lives. 

Be the side(s) in your multi-sided market

Anyone who's tried to start a multi-sided market business (the most common being a two-sided marketplace, like eBay, with buyers and sellers) knows one of the first major challenges is the chicken-and-egg problem. In order to attract sellers, you need buyers, but in order to attract buyers, you need sellers. On a dating service, the two sides are obvious. And so on.

How to get out of this infinite loop of emptiness? Kickstart things by being one or more of the sides in your multi-sided market. In other words, fake it til you make it.

Seeding and Weeding
Dating services simulate initial traction by creating fake profiles and conversations. Users who come to the site see some activity and are incentivized to stay on. Marketplace sites may also show fake activity to attract buyers and sellers.
Seeding Demand
In the book, Paypal Wars, Eric M. Jackson talks about how PayPal grew a base of sellers who accepted PayPal by creating demand for the service among buyers. When Paypal figured that eBay was their key distribution platform, they came up with an ingenious plan to simulate demand. They created a bot that bought goods on eBay and then, insisted on paying for it using PayPal. Not only did sellers come to know about the service, they rushed onto it as it already seemed to be getting popular. The fact that it was way better than every other payment mechanism on eBay only helped repeated usage.

Other great war stories and tips within.