[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 15
IMPERFECT
INFORMATION IN
THE PRODUCT
MARKET
∂
It was never any secret to economists that the real world did not match the
model of perfect competition. Theories of imperfect competition and monopoly
such as those covered in Chapters 11 and 12 have been put forth from Adam
Smith’s time to the present.
Another limitation of the model of perfect competition has recently attracted
attention: its assumption of perfect information—that market participants are fully
informed about the goods being bought and sold. By incorporating imperfect information
into their models, economists have come a long way in closing the gap between
the real world and the world depicted in the perfect competition, perfect information
model of Part Two.
This chapter provides an overview of the major information problems of the
product market, the ways in which market economies deal with them, and how the
basic model of Part Two has to be modified as a result. In Chapter 16, we will see
how information problems affect labor markets. We start our analysis of information
problems by examining a market you may be familiar with—the used-car market.
The Market for Lemons and
Adverse Selection
Have you ever wondered why a three-month-old used car sells for so much less—often
20 percent less—than a new car? Surely cars do not deteriorate that fast. The pleasure
of owning a new car may be worth something, but in three months, even the car
you buy new will be “used.” Several thousand dollars is a steep price to pay for this
short-lived pleasure.
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