Steve Bain

Symmetric Information Definition

By Steve Bain

Symmetric information in economics is one of the main requirements for the efficient functioning of competitive markets, and it helps to prevent sellers from extracting an excessive price from buyers if those buyers have an equal amount of information about a given product.

Most of economic science is built upon the simplifying assumption that all knowledge is symmetric and complete i.e., that both buyers and sellers have full information about the products on the market. This simplification does not detract from the usefulness of economic modeling, but it is never true in reality that anyone has complete information.

A more accurate definition of symmetric information merely requires that both buyers and sellers have the same ability to access information, not that they have complete information. This is a distinction that is sometimes overlooked by other writers, and the confusion arises from the fact that asymmetric information exists to some extent in all markets (i.e., where information is unequal and thereby incomplete), and information-symmetry  is mistakenly assumed to represent the opposite of that situation.

Symmetric Information in Business

The benefits of symmetrical information in business is to allow the efficient functioning of the price mechanism. Prices represent invaluable information to both consumers and producers, because they help to guide producers into allocating resources into the production of the most valuable goods and services.

In the private sector, when free of interference from government mandates, pricing reflects the supply of, and demand for, products. Assuming that there are no barriers to entry that prevent new entrants into an industry, rising prices will lead to higher profits which in turn will encourage new firms to enter an industry and increase production. This extra supply then helps to stop prices from rising too high, and ensures that firms are unable to earn excessive profits at the expense of consumers.

Prices also provide information to consumers that allow them to maximize the utility that they gain from their income expenditure. Consumers compare the prices of all goods and services when deciding which combination of goods will provide them with the optimum level of utility (or satisfaction) given their limited resources.

Of course, this is a simplification of the real world and there are many other requirements that need to be met in order for competitive forces to operate in this way. Market power exists in many industries such that prices can be manipulated in suboptimal ways, but the existence of symmetric information is one of the main major forces in favor of increased efficiency and fairness.

Symmetric Information Example - Financial Markets

Information in the market place varies depending on the complexity of the product that is being sold. It is extremely difficult for a greengrocer to dupe consumers into paying excessive prices for the fruit and vegetables that he/she sells. Consumers are well informed about what an apple should look like and feel like, and there's plenty of market information available about what sort of price and quality standards should apply.

For more complicated products, like financial assets, the available information is much more limited and uncertain. There is also much more scope for corruption in the form of insider-trading whereby an individual may act illegally by using knowledge of an industry or specific firm that is not available to the public.

For example, if a board member of a company knows that the company is about to be bought out by a larger firm, and that this information is not in the public domain, there will be a big temptation to act illegally and invest in more shares in the knowledge that the share price will likely rise sharply once knowledge of the impending company acquisition is known. This sort of insider-trading is illegal, because the use of this sort of information is unfair and allows one person to benefit at the expense of another.

It is important to note that it is not just inside information that presents difficulties for investors in global financial markets. The very nature of the 'utility' being sought from stock market investment is highly uncertain. Utility here is gained from setting aside current consumption for an increased amount of consumption at a later date, usually in retirement. The problem relates to the lack of information about what the future value of financial assets will be. We can take a back seat and trust a professional investment company to allocate our assets purchases, but which company should we trust to do this?

Then there is the problem of asset market bubbles whereby asset price increases shoot up way beyond anything that is justified by the market fundamentals. At times like this there is a 'FOMO' problem at play i.e., a Fear Of Missing Out. Consumers can drive asset price changes merely by the frenzied nature of their buying actions. Wiser investors sell assets during these bubble market situations, but here they are merely exercising better judgement of available information, they are not accessing any information that is unavailable to the general public.

The presence of symmetric information is clearly insufficient to guide wise investment choices in such complex markets, and this is a legitimate problem with free-market economies. Only perfect, complete information of the marketplace and the economy can guide investors into the optimal portfolio of investments, but this sort of information is simply not available. Even the wisest investors can only act on the balance of probability when analyzing information, and even the very best of them have suffered many losses from previous mistakes.

Symmetric and Asymmetric Information

With symmetric information, both consumers and producers have the same information with which to allocate their resources. If this were not the case then one party or the other in a transaction would be able to make gains at the expense of the other party, meaning that a market failure (known as asymmetric information) would exist.

The insider-trading problem discussed already is a good example of asymmetric information, but there are many others in the economics books and journals. The traditional example in the undergraduate economics textbooks relates to the market for used cars. In this market the used car salesman enjoys more information than prospective buyers about the quality and reliability of the cars on sale.

An unscrupulous salesman can use this information to extract a higher price than justified (rather than offering a fair discount) if he/she conceals defects with the cars. Consumers do have extensive legal rights in these circumstances, so the opportunity to exploit information here is mitigated.

Game Theory is one of the advanced courses in economics that deals with consumer choices given different types of information and payoff matrices, but that is a topic for another article. 

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