Asymmetry of Information, Trust-Building and Market Quality: Governing the Quality of Goods in Modern Asia

Abstract

Markets characterized by fraud and poor quality products cannot be viewed as effective and well functioning, although we can find such markets anywhere in the world at any time in history. The quality of goods is one of the determinants of market quality. This chapter investigates the production of low-quality goods, imitation, and counterfeiting, and the dishonest trading that frequently occurred in Asia during the period of overall market expansion from the nineteenth to the twentieth centuries. It examines how the asymmetry of product-quality information was reduced and mechanisms were created to make the stable trading of quality products at appropriate prices possible. This chapter provides an introduction to Part I of our collaborative project. It first describes a theoretical framework for thinking about market quality. This framework is distinguished by its focus on competition quality, information quality, and product quality as determining factors in market quality. It also emphasizes the fairness of prices, not just the efficiency of resource allocation. Then the chapter explores the approaches used to alleviate asymmetry of quality information, including enhancements to information disclosure systems and regulations, creation of appraisal markets, creation of markets for certified products by quality inspection, and establishment of brands, and learning and building trust among the parties to transactions within the market. There are various methods from institutional solutions outside the market taken by government and other third-party organizations, to market-based solutions undertaken by the parties to the transaction. Yet these all face the same issue of how to secure trust in assessments of product quality. The research reported in Part I found that the formation of new trading systems by market participants have functioned effectively when new markets are being formed, when demand suddenly expands, and when it is otherwise difficult to establish screening systems covering entire markets.