eBay Motors asymmetric information
Article: https://scholar.harvard.edu/files/lewis/files/aer2e1012e42e1535.pdf
In this article, Lewis talks about how the rise of the internet has led to such a large rise in the amount of goods being traded online. Online trading often intensifies information asymmetries, as the buyer is not able to view the good in person; it is more difficult to infer the quality of the good they are buying. The question raised in this article is why online trading has increased so much despite these severe information asymmetries. Lewis argues that sellers offer a type of “contract” on the quality of their goods. By disclosing information about the goods in text and photos, they are promising to deliver the item that is listed. If the disclosures are “sufficiently detailed and enforceable”, then the information asymmetry becomes negligible in the performance of the online trading market.
Lewis examines the disclosures offered on eBay Motors to further explore his hypothesis. eBay Motors was the largest used car market place in the U.S. at the time this article was written (2011). Lewis uses the large set of data from this marketplace to demonstrate that certain claims are easy to enforce, quality disclosures such as text and photos greatly influence prices, and the cost of disclosure affects how much information the seller posts and in turn affects the prices. Some relevant types of disclosure costs would be technology, bandwidth, time, etc.
eBay Motors is an example of a market with asymmetric information. The cars are of varying qualities and are valued at different prices. The article relates to what we learned in class because it demonstrates the effect of signals on prices the seller obtains. The signals of quality in this case are text and photos describing the cars. The article modeled the log price in the auction as a function of web page characteristics and ran a regression. This was able to empirically demonstrate how strongly signaling good quality is able to increase the final price in the auction. While disclosing more information seems to have great benefits, the article also points out how a seller must balance the cost and reward of signaling.