Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you’re trying to sell a company a new accounting system that will reduce costs by 10%. Instead of naming a price, you offer to give them the product in exchange for 50% of their cost savings. Describe the information asymmetry, the adverse selection problem, and why soft selling is a successful signal.

Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you’re trying to sell a company a new accounting system that will reduce costs by 10%. Instead of naming a price, you offer to give them the product in exchange for 50% of their cost savings. Describe the information asymmetry, the adverse selection problem, and why soft selling is a successful signal.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 19.5IP

See similar textbooks

Similar questions

One method of solving this problem is through signaling. Signaling is a strategy one uses when they have information. The goal is to use a signal to convince the buyer that the good or service that is being sold is quality and will meet the buyer's wants. Offer an example of a company that uses a signal to help sell its product. What is the signal? What information is the signal trying to convey? Do you think the signal is effective? Why or why not? Does this signal improve market efficiency? Why or why not?
Screening and Imperfect Information Asymmetric information refers to a market where one side (either the buyer or the seller, but usually the buyer) has less information than the other side of the market. When there is asymmetric information in a market, markets are inefficient because the side with less information doesn't want to take the risk involved in buying (or selling) the good or service. One method of solving this problem is through screening. Screening is a strategy one uses when they don't have information. A screen can be any indicator that lets the screener know if the good or service is reliable and will meet the screener's wants. • Offer an example of when you used screening to solve a lack of information. What kind of screen did you use? • Was the screen effective? Were you happy with the result?
John wants to buy a used car. He knows that there are two types of car in the market, plums and lemons. Lemons are worse quality cars and are more likely to break down than plums. John is willing to pay £10, 000 for a plum and £2, 000 for a lemon. Unfortunately, however, he cannot distinguish between the two types. Sellers can offer a warranty that would cover the full cost of any repair needed by the car for y ∗ years. Considering the type and likelihood of problems their cars can have, owners of plums estimate that y years of guarantee would cost them 1000y, owners of lemons estimate that the cost would be 2000y. John knows these estimates and decides to offer £10, 000 if a car comes with y ∗ years of warranty, £2, 000 if a car comes without warranty. For which values of y ∗ is there a separating equilibrium where only owners of plums are willing to offer the y ∗ -years warranty? Clearly explain your reasoning.
How might imperfect information impact price? Group of answer choices Because buyers cannot determine the true quality of a product, they might tend to bid up the prices. Because they might not be able to present all the information about a product, sellers might temporarily lower the price to make potential buyers think the product is of excellent quality. Imperfect information might tend to cause prices to be perfectly elastic. Buyers cannot distinguish which goods have a higher quality and might be less likely to pay higher prices for that good.
In the famous court case Stambovsky v. Ackley a prospective homebuyer attempts to back out of a purchase after learning that the home was widely believed to be haunted since the current owner had it included in a tour of haunted homes. Prior to the prospective buyer backing out, what imperfect information situation applied to this situation? Explain.
Which of the following can be an example of signaling? Group of answer choices An air-conditioning manufacturer offers a 50-year warranty. A lawyer offers to be paid only if the client wins. A student pursues an MBA. All of the above. None of the above.
Fred wants to hire Barney to manage his retail store. Barney can apply a high level of effort (at a cost to him of $30), a medium level of effort (at a cost to him of $10), or a low level of effort (at a cost to him of $0). Fred's profits depend not only of the level of Barney's effort but also on the state of consumer demand. Fred believes that demand will be high with probability 50 percent (and therefore demand will be low with probability 50 percent). Fred has determined the following possible profit levels (before paying Barney) will occur depending on Barney's effort and the state of consumer demand: Demand low high effort low 20 40 medium 40 80 high 80 100 Of the choices below, what is the largest percentage range of profit provided to Barney that would ensure Barney would supply high effort? a. any percent greater than 75.00 percent (3/4). b. any percent greater than 66.66 percent (2/3). c. any percent greater than 50.00 percent (1/2).d. any…
Fred wants to hire Barney to manage his retail store. Barney can apply a high level of effort (at a cost to him of $30), a medium level of effort (at a cost to him of $10), or a low level of effort (at a cost to him of $0). Fred's profits depend not only of the level of Barney's effort but also on the state of consumer demand. Fred believes that demand will be high with probability 50 percent (and therefore demand will be low with probability 50 percent). Fred has determined the following possible profit levels (before paying Barney) will occur depending on Barney's effort and the state of consumer demand: Demand low high low 20 40 effort medium 40 80 high 80 100 Of the choices below, what is the largest percentage range of profit provided to Barney that would ensure Barney would supply high effort?
Would this be d? Dan, age 19, may have trouble buying auto insurance at a low price because insurance companies a)operate in markets in which screening is inefficient. b)fear that he has private information that his deductible is too high. c)have private information that his signals are valid. d)have private information that he is a risky driver. e)fear that he has private information that he is a risky driver.
In the automobile insurance market, adverse selection occurs when Group of answer choices A) drivers with greater risks buy a policy with large deductibles. B) drivers with greater risks buy a policy with no deductibles. C) uninsured drivers drive recklessly. D) insured drivers drive recklessly.
Discuss the consequences of asymmetric information for Market Equilibrium.
Adverse Selection refers to a situation in insurance markets in which individuals change their behavior after obtaining coverage, resulting in increased insurance costs True or False