Asymmetric Information and Market Regulation

Asymmetric Information

Knowledge held by one party, not the other.

Consumer Overpay

Consumers pay too much due to misinformation.

->

Underinformed consumers = inaccurate WTP =

mispositioned D curve

Consumers pay too much when they do not have full information about product drawbacks

Incomplete information = consumers over-value = ↑ price (P) =Overproduction

WL down

decrease demand

higher (P)/(Q)

- CS shrinks

Regulation

Regulation(gov or private) closes gaps in information =

socially efficient output

Private Regulation

Non-governmental measures to ensure compliance and safety.- efficency generates profit funded by regulatory beneficiaries (firms/people) motivated by demand

NGO Role

Nonprofits that advocate for better regulations.

Producers underestimate true cost

Underinformed producers = inaccurate MC =

mispositioned S curve

Original price is lower because producers underestimate true cost -Goods sold too cheaply = overproduction

WL up

supply increases

- Lower (P) & higher (Q) than efficient-

-PS shrinks

Market Failure

Inefficiencies due to information asymmetries.

Government regulation can try to fix it

Regulation closes the gap -but 100 % closure is not socially efficient

-Socially efficient regulation R*. MC =MR of regulation

-MB = rises than falls = diminishing Demand (MWTP)

-MC rises more = more resources are required at the margin to achieve incrementally stricter standards

-R1 > R*= overregulation = Wl

-Ro R*= underregulation = Private regulation can profitably close gap + generate economic net = blue triangle

-Ro = too little regulation =underregulation

-R1 too much regulation =overregulation

NGOs take action when

Regulation (gov or priv) is insufficient

- encourage investors, consumers, emp to demand more inv

- is successful when firms fear inaction puts profit at risk

intermediaries make money by

providing info when gov underregulates

Why did Nike face criticism

- didn't pay workers living wage

- employed children long hours

- health and safety violations

- high profits but doesn't reinvest

who is activist that targeted Nike

jeff Ballinger

What did Nike do with the first public criticism

say not mfg company but a marketing brand

response-defensive + deflection of blame

-Invested more in marketing "Business as usual"

who were the first people to attack Nike

students

press target celebrities

protests at store openings

What did the social lobbying do

shift d curve down

- beat Nike's lobbying

- Shifted the demand curve left (lower P & Q)

- shrunk CS

How did private reg restore safety with Nike workers

Shift S curve up

- informed them about unsafe work environment

- This shifted supply curve left (higher P & lower Q)

- Shrunk PS

After losing $400 m what did Nike do

- Hire Dusty Kidd for labor conduct code

- hired Andrew Yang to evaluate new code

- hired EY to audit

- hired Dartmouth to survey workers

Nike knew more than others

(consumers,workers,regulators)

->

True working conditions and wages in outsourced factories

-

overvalued-overproduction of nike products

Information Gap Nike

Workers -

Didn't know their rights how wages compared internationally

Consumers -

Didn't know about child labour, unsafe conditions ; $1-2 day wage

Nike voluntarily

adopted more private regulation than other business

Nike new contractor requirements

- min age 16 apparel & 18 shoes

- comply with US AIR standards

- managers must learn local language

- loans to workers

- Led AIP and FLA

Rebook's better initial response compared to Nike caused

- less investment required compared to Nike- lower Q for MC = MB

Priv regulation did what to Nike in end

kept out of Bangladesh

What happened in Bangladesh

- overcrowded infrastructure killed 1100 workers

- 200 mfgs had to donate 1 billion to upgrade safety

- Nike stayed out and save money

AIP

- Clinton-era coalition of companies

- labor groups, and NGOs formed to create fair labor standards

- establish a code of conduct and monitoring system

FLA

- long-term outcome of the AIP

- independent factory audits and labor standard

- Nike became a founding member

steps did Nike take to address labor criticisms

- Code of Conduct, hired Ernst & Young for internal audits

- Andrew Young to evaluate reforms, and provided training for factory managers,

Why did activists criticize Nike's reliance on internal audits and partnerships like the AIP

- controlled the auditors

- AIP lacked truly independent enforcement.

- Some labor and religious groups left the AIP, believing it was more about PR than meaningful change

why did corporations leave AIP

wouldn't agree to independent monitoring