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Lecture Principles of Microeconomics: Chapter 15 - James D. Miller

Chapter 15 - Challenge to market effectiveness 5: Incomplete information. After reading this chapter, you should be able to answer the following questions: How does incomplete information affect customers? How can brand names, money-back guarantee and eBay ratings reduce the effects of incomplete information? What is adverse selection? How does adverse selection manifest itself in the used car market? | Chapter 15 Challenge To Market Effectiveness 5: Incomplete Information McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives How does incomplete information affect customers? How can brand names, money-back guarantee and eBay ratings reduce the effects of incomplete information? What is adverse selection? How does adverse selection manifest itself in the used car market? What is agency cost? How do consumers face agency costs? How does incomplete information about potential employees affect firms? How does incomplete information affect health insurance firms? 15- Incomplete Information If customers have incomplete information about products’ qualities, customers don’t always get what they want. Businesses sometimes use uncertainty to cheat customers. Product uncertainty harms firms as well as consumers. Consumers pay less for a product the less sure they are of the product’s safety and reliability. 15- Brand . | Chapter 15 Challenge To Market Effectiveness 5: Incomplete Information McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives How does incomplete information affect customers? How can brand names, money-back guarantee and eBay ratings reduce the effects of incomplete information? What is adverse selection? How does adverse selection manifest itself in the used car market? What is agency cost? How do consumers face agency costs? How does incomplete information about potential employees affect firms? How does incomplete information affect health insurance firms? 15- Incomplete Information If customers have incomplete information about products’ qualities, customers don’t always get what they want. Businesses sometimes use uncertainty to cheat customers. Product uncertainty harms firms as well as consumers. Consumers pay less for a product the less sure they are of the product’s safety and reliability. 15- Brand Names Firms that can earn consumers’ trust increase the demand for their products. Brand name greatly reduces the uncertainty facing consumers. A well-known brand name is an asset only if customers have positive experiences with the products. A brand name makes it easy for customers to associate their negative experiences with the company. Not-for-profit groups sometimes use brand names to promote their causes. 15- Value of Brands The value of a brand is how much extra profit over the long term a company receives because of the brand. Company Value of Brand Coco-Cola $67.5 billion Microsoft $59.9 billion IBM $53.4 billion GE $47.0 billion Intel $35.6 billion Nokia $26.5 billion Disney $26.4 billion McDonald’s $26.0 billion 15- Money-Back Guarantees Firms use money-back guarantees as a means of winning customers’ trust. Money-back guarantees allow consumers to recover most of the cost of buying a product if the product proves defective. 15- eBay Ratings eBay is an .