Q2:The XYZ Co. is hiring salespersons. Due to the existence of asymmetric information, the firm has decided to pay the salespersons a fixed hourly rate that is independent of how much they sell or their ability to sell. Explain what type(s) of asymmetric information problem(s) may take place and how can they be addressed. You are expected to illustrate your answer using relevant diagrams and/ or equations.
Salespersons, being boundary spanners between the organization and customers, play a critical role in enhancing customer satisfaction in order to maintain the buyer–seller relationship in situations involving service ...view middle of the document...
In a firm, information is an essential key player and today, it’s creating many exciting opportunities for both businesses and individuals. With information, firms can work hand in hand, know the welfare of their customers, identify opportunities, make better decisions and spot threats. However, a firm that has an imperfect knowledge about the labour market, employment, goods and service is said to be under Asymmetric information. firm xyz.co hired a salesperson and pays a fixed hourly rate that is independent of how much they sell or their ability. All of those are due to asymmetric information either on the labour market or the market its self.
According to George Herbert (1651) “the buyer needs a hundred eyes, the seller not one”. Asymmetric information is a situation in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the market place i.e imperfect knowledge when one side of the market has better information than the other.
In many cases of asymmetric information, the less informed side knows that other side has more information given the awareness; the less-informed side of the deal may be able to make references from the informed side’s action. The informed party may engage in opportunistic behaviour: taking advantage of someone when circumstances permit.
Opportunistic behaviour due to asymmetric information can lead to market failures, destroying many desirable properties of competitive markets. There is perfect information in a competitive market and consumers can buy anything they desire at its marginal cost. Therefore, firms that have the information that consumers lack, may sell only the lowest-quality good, and the price may be above marginal cost. Market failure is eliminated if consumers can inexpensively determine the quality of a product or learn that various stores change.
When consumers have asymmetric information and when search costs and the number of firms are large, single-price equilibrium in a competitive market occurs where the price is the price a monopoly would set. If there is zero search cost, then in the presence of asymmetric information, competitive firms will charge the competitive price. As long as there is asymmetric information among consumers and positive search cost, if price is below the monopoly price and the same across all firms, then a competitive firm can profit from raising its price but by no more than the search cost.
As noted earlier, asymmetric information leads to problems of opportunism, where by the informed person benefits at the expense of the person with less information. There are two asymmetric information problems that may take place due to the firms hiring of a salesperson and been paid a fixed hourly rate that is independent of how much they sell or their ability to sell. They are;
- ) Adverse selection. - ) Moral Hazard
Adverse selection; can be defined as when products of different qualities are sold at...