Have you ever heard about information asymmetry? Well, in simple terms it refers to a scenario where when two parties are in a deal, one knows more than the other. In essence one of the two will be wielding more information than the other party. It becomes unsurprising to find the more knowledgeable party taking advantage of the other party. When you really look at it, it seems as if literally any transactional setup involves some form of information asymmetry. Anyways, in this article, I shall be looking at some businesses in Zimbabwe that take advantage of information asymmetry.
Implication Of Information Asymmetry
Before I cite some examples let me briefly explain this because it adds more light to this discussion. There are 3 core implications of information asymmetry. These are the monopoly of knowledge, adverse selection, and moral hazard. The first one is self-explanatory – it can be both internal and external to a business. The moral hazard occurs when someone makes decisions on behalf of someone that involves sky-high risk. These would be decisions they would have not made had they been the one to lose out in the event the decision backfires. The person would obviously have more information than the one on whose behalf they are making the decision. Otherwise, if that person had known they would have ordinarily disallowed them from making the decision. An example would be someone managing a professional boxer. They can agree to a fight where the stakes will high but the boxer might not be privy to the real catch which might be a fat package for the manager through underhand dealings. Adverse selection somewhat characterises every transactional deal. Both parties will be riding on particular information which they feel essential to the deal. However, one of the parties will be wielding inferior information.
Human And Animal Healthcare
I will reference an example I have witnessed on several occasions. I once worked for an agribusiness company that specialized in animal health and nutrition. I noticed that in a bid to push sales, sales reps would at times be encouraged to recommend certain veterinary products when someone came with a livestock issue. Interesting some of what would be recommended farmers could ordinarily do without and still manage their livestock. At other times sales reps would recommend a more costly solution when a cheaper and still effective one is there. These whole dynamics are also found in human healthcare too. This is made so by the fact that the client or patient usually has to rely on the guidance they get from the specialist or expert. The consumer typically has way less knowledge about the subject matter and is liable to manipulation by the service provider.
Vehicle Sales, Maintenance And Repairs
This is one of the areas where information asymmetry is rampant. This is particularly so when looking at pre-loved (or second-hand vehicles), for instance. The seller can lie or misrepresent a lot about the true nature or state of the vehicle. In some cases, we even hear of people tampering with the mileage to make it lower. The bottom line is most buyers will usually have to take the seller’s word for it when they might just be manipulated in the whole process. The seller will most definitely always know more than the buyer ever will. The same applies to maintenance and repair where the service provider might lie to get the client to spend more. Essentially the service provider can take advantage of the client’s usually limited or zero technical knowledge.
Insurance Companies
The field of insurance is a highly sophisticated one. As much as we might try to explain how insurance companies make money, once wrote an article on this, we might never really know the full details. It is most likely that whenever an insurance company signs up new clients they will not be privy to the true nature of the risks associated with the packages they have chosen. It can actually all be very confusing and it is no wonder why innumeracy is rife in this industry. As in, most of the mathematical aspects involved are not easy to grasp for most people. It is really is game of stats and it is usually the case that the insurance company will always know way more than you the client. Even if they are charging you unreasonably you might never actually know.
Law Firms
Information asymmetry is also prevalent in the law firm business. Law is a specialist field for the most part which is why a client will always literally be at the mercy of the lawyer. Legal matters are not always black and white and as such it might not be easy to grasp the implications of a particular case. Let me just cite a simple example. A lawyer might encourage a client to go for trial yet knowing fully well their client stands no chance. They can simply do that just to cash in on the fees the client will have to pay throughout the process. An out of court settlement could have been in the best interest of the client but since they have limited knowledge they would just go with the lawyer’s recommendation.
These are some of the businesses that take advantage of information asymmetry in Zimbabwe. There is a fine thin line that separates manipulative from ethical business practices when it comes to this issue. At the end of the day, the client has to do their best to know as much as they can. As much as clients tend to be the bigger losers it does not rule that businesses can also be at the mercy of the client. It works both ways so both parties must be as knowledgeable as they can.
