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Solving Information Asymmetry: How Today's Companies Are Empowering Consumers and Creating More Efficient Markets

Posted: 09/09/2013 10:53 am

Until recently--and even now depending on the market--there has been an unbalanced distribution of information between buyers and sellers. Merchants have long held the advantage. With full information over consumers, they've had the power to set prices and hide crucial information about products and services, leaving buyers at the mercy of sellers. Consumers had few resources for unbiased information, where they could go to find average prices for goods and services across any market--from real estate and autos to careers and travel.

This information asymmetry was negatively affecting consumers, businesses and the competitive market in general. Consumers had to make decisions based on partial information. Too often, the only information consumers had access to was the information provided by the same merchants who were trying to make the sale--biased and incomplete information. It wasn't too long ago when buying a car involved going to a dealer and asking the price and specs of car--with no third party information to reference as a base point. Consumers would often end up paying far above the true value of the automobile. Worse, some hapless buyers ended up with "lemons," a term coined to describe cars found to be defective only after they had been purchased.

At the same time, honest businesses that sold quality products at reasonable prices would often lose out to their manipulative counterparts who masked subpar products with big-budget marketing ploys and slick salespeople. All this resulted in rewarding companies whose products and services weren't actually competitive on a level playing field, a decrease in the quality of products and a market that wasn't efficient--after-all, an efficient market depends on consumers making rational decisions, and consumers can only make rational decisions when they have full and equal access to the same information that their seller counterparts do.

But today, a growing number of companies are emerging that shift this asymmetry of information back to balance--arming consumers with the same information that businesses have long had. This shift toward a more balanced distribution of information benefits consumers and quality businesses alike. With full information, consumers are able to see through marketing schemes, overpriced products and inferior goods and services. They can then offer their business to the companies that offer the highest quality offerings for the most reasonable price.

The market for companies that are providing consumers with this information is just beginning to emerge, with companies like Edmunds providing information on auto specs and pricing, sites like Redfin and Glassdoor arming consumers with information around real estate and careers respectively, and companies like FindTheBest and its network of sites offering a broad range of information on highly-considered products and services from familiar markets like cars and smartphones to newer verticals like colleges and dog breeds. By increasing transparency and trust between buyers and sellers through equal access to information, these companies are helping to create more efficient markets.

Edmunds: Building Trust Between Car Buyers and Sellers

The auto industry is one such market in which buyers are increasingly gaining access to equal information and being put on a more level playing field.

In 1970, the term "information asymmetry" was used in a research paper to describe a situation in which the seller knows more about a product than the buyer. This imbalance in information between the two parties left consumers making highly considered purchase decisions without having full knowledge about the products they were buying--and oftentimes the car they ended up buying was not what was advertised. This caused massive distrust between buyers and sellers on the whole, regardless of whether the seller was being honest or not.

"Buying a new or used car is the second biggest considered purchase that anyone has to make," said Edmunds CEO Avi Steinlauf. "It's also a stressful and, sometimes, overwhelming process. At Edmunds.com, we've dared to ask the question: 'Why does car buying have to be this way?' We strive to make it easier for people to find the car that meets their every need. A big component of that is to make sure car buyers have as much accurate information as possible. After all, a more informed shopper makes for a better quality shopper at the dealership, which benefits both the buyer and the dealer," Steinlauf said, adding that Edmunds is focused on building trust between car buyers and sellers.

"But information is just one hurdle. We've also taken steps to listen to car buyers and address parts of the process that bother them the most. For example, our research found that the biggest unmet need of car buyers is simply getting an actual price on a specific car. We've tackled this issue head-on with our new Price Promise product, which allows participating dealers to offer instant, real prices on cars listed on Edmunds.com's inventory pages. It's remarkable how simply providing a fair, upfront price can get deals off on the right foot. Our focus moving forward is to continue identifying these pain points and figure out how Edmunds.com can play a role in building a bridge of trust between car shoppers and dealers."

The auto industry, however, is only one such market in which companies have entered with the mission of informing and empowering consumers. The real estate market is another market in which consumers are gaining more access to information with which to make more informed decisions.

Redfin: Arming Homebuyers with Equal Access to Information

Investing in real estate or buying a home is one of the biggest purchase decisions a consumer will make in their lifetime. Yet in the past, consumers in the market for a new home had very limited insight into how much an average home in a particular area should actually cost, how long a property had been on the market or access to important historic details about a property of interest.

Until recently, companies like Redfin had not entered the real estate market--providing homebuyers with critical information like average home prices by neighborhood, a property's historic sale pricing, as well as details on similar homes for comparison purposes.

"With complete access to the databases that realtors themselves use, Redfin is one of the only websites to show consumers exactly what a realtor sees about what's for sale and what just sold, giving regular folks the best possible shot at buying the right house for the best possible price," said Redfin CEO Glenn Kelman. "We send instant alerts to mobile devices so consumers often know about homes for sale before their traditional agent--and the other buyers competing to buy that house. The data we gather firsthand from our own Redfin real estate agents also goes directly to consumers. Our website publishes near-real-time data on whether thousands of home-buyers signed offers in greater or lesser numbers the weekend after an interest-rate spike or a stock-market jolt, so our customers know first when the market's slowing down. This is the juicy stuff that home-buyers need when sweating out the biggest purchase of their lives."

Glassdoor: Putting Career Information Into Context for Job Seekers

Career information--from average salaries to insight into company management--is another area in which companies have long held an advantage over individual job seekers. Even today, salaries are something most employees keep private. And even prospects who are offered interviews rarely gain real insight into how a particular company is run, how the company manages, or other important indicators that could help shape an informed decision. Candidates often make decisions based on biased and limited insight offered up by the hiring party. Glassdoor, however, has made it its mission to solve this problem.

"Glassdoor is on a mission to help people make more informed career and job decisions. Over the past five years, we've disrupted how people make these important decisions by increasing workplace transparency," said Glassdoor's SVP of People Allyson Willoughby. "People are more information hungry than ever and today, Glassdoor is influencing them as they make decisions through researching what it's really like to work at a company, from company culture to what management is like to salary potential and more."

FindTheBest: Empowering Consumers About Highly Considered Products and Services Across All Verticals

Established in 2010, FindTheBest was created to help consumers think like experts. By providing users with the best information and powerful tools with which to sort and filter, the company seeks to empower consumers to research like specialists.

I started FindTheBest because I wanted to solve a problem," said FindTheBest CEO and Founder Kevin O'Connor. "When you're unfamiliar with a topic--whether it's cars, insurance, or antivirus software--researching can be overwhelming. You're not an expert: you don't know where to look or how to interpret all the information on the subject. I wanted to build a research hub where people could think like an expert in just about any topic."

Today, a growing number of companies across a broad array of verticals are stepping in to provide data and information to consumers. This move toward a balance of information between merchants and consumers is better for consumers, businesses and the market in general. When you give buyers the same information that sellers have, you enable them to make informed decisions, you elevate the quality of products, make pricing more competitive and make the markets more efficient.

 

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