I've gotten a bit behind on Freakonomics, but none-the-less, I am here posting on Chapter 2.
Chapter 2's main focus was on information asymmetry - when one party knows more about a product than the other party. Being in the MBA program, we all know much about this topic. Businesses use information asymmetry to gain a profit. An example from the book was selling houses. Sellers will use certain words in newspaper ads to hide the condition of a house; they will use words like "fantastic" or an exclamation point to build up the house to be better than it actually is. In these cases, there are things about the house that the seller wants to hide.
Another interesting topic in the chapter was the prices of term life insurance. I don't know much about term life insurance or insurance in general, but what was described in the chapter made sense. Since term life insurance is usually a constant price, as opposed to health or dental insurance, term life insurance would go down when information asymmetry is evened out due to the Internet.
This is similar to auto insurance dealers like Geico and State Farm. Auto insurance dealers used to make offers to customers and they had little information about competing prices from other insurance dealers. Customers had to either accept the offer or decline it and move on to another dealer. Now, customers can go on the Internet, go to each auto insurance Website, and view each dealers' prices. Sites now have their own prices and the prices of competing companies so that they can compare prices all on one site. In my opinion, the competing prices might not be the most accurate, as the insurance companies want to make their prices look the best, so they probably manipulate the others prices in one way or another. Just my opinion....
One problem with the Internet is that you don't see items right there in front of you, in black and white (figuratively). You see it across a computer screen. You can't see and touch that car or TV right in front of you that you want to purchase. You have to take pictures as an honest representation of. By the time it gets to you, it could be changed or manipulated from when you saw it over you Internet connection. You could argue, but the seller could make something up, and sometimes it may not be worth your time to argue.
Information asymmetry is prevalent in Internet sites such as Ebay. When a seller is selling an item on Ebay, they could describe the item so that it makes it seem the item is in better condition than it really is. Ebay has combated this by using feedback from buyers and sellers to keep people honest, and if a user gets enough negative feedback, they can get their account temporarily or permanently suspended.
I will be back soon with Chapter 3!
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2 comments:
Justin,
I enjoyed all of your insight with information asymmetry and the internet. Having worked in real estate myself, I can completely relate to this chapter. The internet has made it much easier for people to look for homes online. With many websites, you can actually access the MLS which is a listing service that was exclusive to realtors, but not anymore. The internet has made searching for a home much easier then it was previously. However, unlike many things, it is rare to buy real estate property over the internet because of the touch and feel aspects, although it has happened.
I also agree with the auto insurance websites. I have always thought about the accuracy of those quotes. However, they would probably have to be somewhat accurate or it would be false advertising. I might have to look into that :)
Lindsay
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