Question

how does signaling and screening relate to adverse selection and price discrimantion

Answer 1

Economists say the potential transaction mentioned above has asymmetric information problem which simply means that the information available to buyers is different from the information available to sellers. We are interested in this problem as they see it in several different cases and because it may contribute to a business failure, a case when a system becomes inefficient economically. However, buyers and sellers have an opportunity to find ways to maximize that interest when there is unexploited interest. Sellers with high-quality goods need ways to show their product quality so consumers can differentiate between high-quality products and low-quality ones.Buyers need to find ways to test for incorrect information yet to allow for truthful information. For markets where goods are easy and easily tested, such problems don't arise. There is little need for this behavior in many agricultural markets, for instance.

Signaling is a Group activity with positive information limited to asymmetric information situations. Screening, which is an attempt to sort out valuable information from useless, is an activity by those with bad knowledge. When two people go on a blind date, they're both unsure whether they're compatible and they're both searching, listening and watching to see if the other person is someone they'd like a second date with. (It is likely that both could also be signalling, because each has knowledge that the other does not.)

When there is asymmetric knowledge on the market, screening can require incentives that promote self-selection or self-revelation by the better informed. For instance, a job with a low-paying probationary period would deter applications from those who know they are not well suited for the role. People who are sure the probationary period will last are more likely to find the offer attractive than those who doubt their potential. A lender who requests collateral for a loan discourages those who question their ability to repay applications.