What Happens in a Market When Information Is Imperfect?

What happens in a market when information is imperfect?

Introduction

        Markets are normally considered to have perfect information; perfect information that results in perfect competition. This notion assumes that participants of the market know the opportunities that are present in the market, as well as their respective prices. In addition, it is assumed that these participants have access to full information concerning the goods, or services, that are being traded. However, the described conditions are rarely the case in the real world. In real-world business environments, market participants usually have access to imperfect information that results in a number of impacts on the operations of the market (Samuelson & Marks, 2012, p.442). It is the objective of this paper to discuss the impact of imperfect information on the market.

The Challenge of Information

        Before tackling the impact of imperfect information, it is vital that the paper tackles the inherent assumptions concerning perfect information in markets. This theory makes an assumption that firms and households are comprehensively informed. This comprehension includes knowledge on all the opportunities that are available in the market, as well as their corresponding prices. Moreover, the theory assumes that market participants know intricate details pertaining to the different goods on offer, including details on the time that it will take to exhaust these goods. Most of the above information, concerning a product, can only be known by using that product. Thus, the theory is faulty in this respect (Samuelson & Marks, 2012, p.450).

        Additionally, the theory of markets having perfect information assumes that customers already know their individual preferences; have in-depth knowledge on what they desire in the product. This assumption is a bit problematic. For instance, it is difficult for students to establish the satisfaction, or enjoyment, that they will derive from a college education. Also, it is difficult for people to know for certain which careers are best suited for them. This is the case as these people gain knowledge of the peculiarities of the different careers, through observation of professionals in these careers. Consequently, they do not gain perfect knowledge but, rather, partial (imperfect) knowledge on their career choices (Samuelson & Marks, 2012, p.450).

        Similarly, the challenge of information is also apparent to firms. The theory of perfect information assumes that firms are fully informed. It is assumed that companies have knowledge on technology that will be most suitable for them. Also, it is assumed that firms know the individual productivity levels of each prospective job applicant. It is also thought that organisations have information pertaining to the exact quality and quantity of work that is applied by each employee, in their organisations. There is also a preconception that firms have information regarding the individual characteristics and prices of all possible inputs. Likewise, the theory assumes that organisations have knowledge concerning the appropriate prices at which buyers will be willing to purchase their goods, now, and in the future (Samuelson & Marks, 2012, p.451).