Information Asymmetry versus Empowered Customers

Information asymmetry is a term from economics describing how one party involved in a transaction typically has more or better information than the other party.  Perhaps the easiest example of information asymmetry is retail sales, where historically the retailer has always had more or better information than the customer about a product that is about to be purchased.

Generally speaking, information asymmetry is advantageous for the retailer, allowing them to manipulate the customer into purchasing products that benefit the retailer’s goals (e.g., maximizing profit margins or unloading excess inventory) more than the customer’s goals (e.g., paying a fair price or buying the product that best suits their needs).  I don’t mean to demonize the retail industry, but for a long time, I’m pretty sure its unofficial motto was: “An uninformed customer is the best customer.”

Let’s consider the example of purchasing a high-definition television (HDTV) since it demonstrates how information asymmetry is not always about holding back useful information, but also bombarding customers with useless information.  In this example, it’s about bombarding customers with useless technical jargon, such as refresh rate, resolution, and contrast ratio.

To an uninformed customer, it certainly sounds like it makes sense that the HDTV with a 240Hz refresh rate, 1080p resolution, and 2,000,000:1 contrast ratio is better than the one with a 120Hz refresh rate, 720p resolution, and 1,000,000:1 contrast ratio.

After all, 240 > 120, 1080 > 720, and 2,000,000 > 1,000,000, right?  Yes — but what do any of those numbers actually mean?

The reality is that refresh rate, resolution, and contrast ratio are just three examples of useless HDTV specifications because they essentially provide no meaningful information about the video quality of the television.  This information is advantageous to only one party involved in the transaction — the retailer — since it appears to justify the higher price of an allegedly better product.

But nowadays fewer customers are falling for these tricks.  Performing a quick Internet search, either before going shopping or on their mobile phone while at the store, is balancing out some of the information asymmetry in retail sales and empowering customers to make better purchasing decisions.  With the increasing availability of broadband Internet and mobile connectivity, today’s empowered customer arrives at the retail front lines armed and ready to do battle with information asymmetry.


This post was written as part of the IBM for Midsize Business program, which provides midsize businesses with the tools, expertise and solutions they need to become engines of a smarter planet.