Question

What is the impact of uncertainty on producers and consumers? How can information asymmetry benefit or harm pricing?

Answer 1

Uncertainty means that the events were not known to the producers or consumers. If the future events are not known the events are uncertain. So the decision is not proper. In information economics markets are uncertain. Reaching market equilibrium is difficult and may lead to market failure.Asymetric information leads to adverse selection problem. The common example where we have problem of adverse selection can be insurance market, second hand car market, etc.In the market we have two main economic agents. Suppose one agent is fully informed and other economic is not informed. The economic agent with incomplete information will be adversely affected and will suffer in future.This asymetric information can benefit some agents while harm some agents and pricing plays a vital role. Let's take a example of second hand car market which is also known as lemons market.

The Lemons problem was developed by George Akerlof,1970. In used car market we have both good quality which was also knows as plums and bad quality which was also known as lemons.
Let the number of sellers of used car market be 200 which includes 100 good quality car owners and 100 bad quality car owners i.e. lemons. Although buyers know that there are both good quality cars and lemons in the market but they fail to understand which one exactly is lemon or good quality car in the market because of asymmetric information.
The minimum price at which the seller is willing to sell the car is known as reservation price for the seller. Here we have:
Reservation price for good quality car owners as $900
Reservation price for lemon owners as $500
There are large number of potential buyers in the market who are willing to buy the used car and the willingness to pay for good quality car is $1900 and willingness to pay for lemon is $700.
If both buyer and seller had full information i.e. symmetric information they could have purchased the used cars, lemons between ($500-$700) and good quality cars between ($900-$1900). But here we don’t have full information i.e. asymmetric information so the buyers will pay the expected value of each car in the market.
Expected value = (0.5*$700) + (0.5*$1900)
= $350+$950
=$1300
Thus, equilibrium price would be $1300. As the expectation value of the cars is more than both good quality cars and lemons reservation price. Both good quality and lemons will sell cars in the market. The owners of lemon will be better off as compared to good quality cars.
Lemon owners will be earning a profit of about $800 (=$1300-$500) and good quality car owners will be earning a profit of about $400(=$1300-$900). Here both good quality car and lemon owners are benefited but the magnitude of the profit is different.
Thus, this equilibrium pricing will benefit seller of bad quality car more than the seller of good quality car in the second hand car market. And this pricing will affect the consumers also. This was the pricing strategy. But we have other pricing strategy as well if the number of sellers differ in good quality or bad quality or we have change in the reservation price. In all the cases we will have different pricing strategy. So the information uncertainty will benefit or harm the pricing depending upon the number of sellers and the reservation price.
Here we can solve the problem in used car with the help of screening , signaling or government intervention.