Information Asymmetry in Perfectly Competitive Spatial Price Equilibrium Problems

Abstract

In this chapter, we continue our investigations into information asymmetry and product quality. We now focus on perfectly competitive markets and present a spatial price equilibrium model with information asymmetry in quality in both static and dynamic versions. Producers at the supply markets know the quality of their products, whereas consumers, at the demand markets, are aware only of the average quality of the products that are shipped to their demand markets. Minimum quality standards are included in order to be able to evaluate the impacts of this policy instrument. We provide qualitative results, in the form of existence, uniqueness, and stability analysis. An algorithm is proposed, accompanied by a convergence proof. The algorithm is applied to compute solutions to a spectrum of spatial price equilibrium numerical examples in order to explore the impacts of information asymmetry under different scenarios. The numerical examples reveal that, as the number of supply markets increases, the “anonymizing” effect leads to a decrease in the average quality. In contrast, as the number of demand markets increases, the pressure to improve quality increases, and the average quality increases. Finally, the results reveal that, after minimum quality standards are imposed, the average quality at the demand markets increases and the prices also increase.