In this chapter, Levitt and Dubner (23) introduce readers to the concept of information asymmetry. The word information asymmetry entails having information which a given businesses often uses to gain advantage over their competitors (Levitt & Dubner 28). On reflection of economics, information asymmetry is a component of a perfect market. Perfect markets often have situations where information is free to all. Levitt and Dubner in this chapter hence provide an in depth description of the concept and its usefulness in the business world (Levitt & Dubner 34).
Levitt and Dubner introduce the concept by explaining a story in history that pin pointed on the importance of secrecy of information for parties involved (Levitt & Dubner 29). In any scenario where competitors exist in a given market, one should always keep secrets to himself or herself, or else risk the business falling (Levitt & Dubner 29). The chapter provides an overview of the Ku Klux Klan before the WWII and means in which they met their downfall. Ku Klux Klan maintained their power at that time through maintaining secrecy of what they did. It is only after a guy named, Stetson Kennedy infiltrated the Ku Klux Klan, learnt about their secrets that they had kept for long from the general public, then later exposed them. It is after the journalist exposed the group that they faced their downfall (Levitt & Dubner 30). This example indicates that were it not for information regarding their whereabouts leaking out to those who really needed it most, they would not have been brought down (Levitt & Dubner 30).
The chapter also provides an example of a real; estate agent when convincing a buyer to take a house while reassuring the owner of fetching a reasonable price for the given house (Levitt & Dubner 27). To maintain relevance in a given transaction, the agent has at all times to keep secrecy of some of the things he or she has in mind (Levitt & Dubner 28). Levitt and Dubner carefully scrutinize this scenario and assess the value of information asymmetry as the thing that keeps such a transaction going (Levitt & Dubner 28). The agent for instance has prior knowledge regarding the price which the owner would wish to sell for and the condition of the house, hence he or she would have to look for a seller with a higher offer in order to make profits (Levitt & Dubner 29). In case the owner and the buyer meet and information is shared, then the agents becomes irrelevant in this situation since the buyer will try to lower the price to that he had been told by the buyer, making him useless in the equation.
In business, there are instances where information asymmetry serve a crucial role in maintain the business process in place. Without that information asymmetry in this case, one party stands to lose (Levitt & Dubner 36). Having disparity in information regarding certain matters is a good business practice whereas free flow of information sometimes might ruin the business process. In an ideal market, information is supposed to be distributed to all parties without bias, but this is not the case of a real business (Levitt & Dubner 38). Businesses often operate on the concept of withholding certain vital information in order to have subsequent advantage over their competitors.
Therefore, by Levitt and Dubner (32) providing an account with which businesses operate, through by providing certain history so as to drive the point home, one could clearly make out why the concept is still important in business (Levitt & Dubner 33). Businesses cannot do without secrets. An excellent example of information asymmetry in the world of business entails a given buyer having information regarding his secret supplier that helps him make his product the best in the market (Levitt & Dubner 33). In case, information regarding this supplier goes out to the general public, it is the worst mistake as competitors would take this to their advantage to produce similar or near products to the original business, thereby killing it in time. Information stands as a key factors for many businesses to operate and should at times be kept in secret for good reasons (Levitt & Dubner 34). Another example one could provide is the case of consumers being blinded by a given advert that a certain product is the best among its competitors, whereas that is not the case. When such a consumers receives information of which of the competitors provides the best product, he or she would move to other side (Levitt & Dubner 35).
In conclusion, this chapter provides a detailed and a better analysis of the concept of information asymmetry. Levitt and Dubner (32) redo their magic once again in providing important concepts in economics, and hence spark mass importance of the value of information asymmetry.
Steven D. Levitt, Stephen J. Dubner. Freakonomics: A Rogue Economist Explores the Hidden
Side of Everything. New York: Harper Collins, 2011.