Stefano Lovo

Asymmetric information, trade and the internet

Asymmetric information, trade and the internet

 

 

OVERVIEW

Internet trade poses a fundamental problem: Buyers and sellers never met, and will never meet, and hence are likely to have different – or asymmetric – information about some element that is relevant for their relationship. For example, buyers have uncertainty about the product quality or the reliability of services, or the seller might have doubts about the buyer’s taste and credit worthiness.
The presence of asymmetric information between a buyer and a seller is one of the reasons why they might not be able to reaching an agreement on a mutually profitable transaction. Nevertheless, every day all types of products and services are traded through the internet between buyers and sellers who are asymmetrically informed. How is that possible?
Through the lens of information economics and game theory, this course analyzes some of the solutions the internet offers to overcome information asymmetry, solutions essential for companies to raise funds or to sell their products through the World Wide Web. In particular, we will explore the economics of search engines, on-line reputation and crowdfunding.

 

 

Learning Outcomes

  • Know what room for trade is what asymmetric information means and why it can make it difficult for a company to sell its products even when there actually are potential customers.
  • Understand the importance of online customers’ reviews to build and maintain a company’s online reputation.
  • Understand the role of online reputation in building trust in online transactions and overcome asymmetric information about product’s quality
  • Know what crowdfunding is, and be able to distinguish between the main types of crowdfunding.
  • Understand what the outcome of an equity-based or a debt-based crowdfunding campaign tells about the profitability of a business.
  • Understand what the outcome of rewards-based crowdfunding tells about the potential demand for firm products.
  • Understand the main economics forces behind internet search engines.
  • Know what targeted advertising is in general, and what the Google AdWords auction is, in particular.

 

Key Topics

Module 1: Room for trade asymmetric information and some tools to analyze it

  • Room for trade and incomplete information
    • Asymmetric information about common and private values
      • Asymmetric information about customers taste
      • Asymmetric information about product quality (Lemon Problem)
  • Bayes rule
  • Non-formal introduction to game theory

Module 2: Online Reputation

  • Solving the Lemon Problem
  • Customer rating
  • Online reputation
    • Building online reputation
    • Maintaining online reputation and trust
  • The wisdom of the crowd

Module 3: Crowdfunding

  • Wisdom of the crowd and crowdfunding
  • The different types of crowdfunding
  • Herding and Crowdfunding:
    • Learning from the crowd about profitability
    • Herd behavior
  • Pre-sale crowdfunding: learning from the crowd about consumer’s demand

Module 4: Economics of search engine and targeted advertising

  • Economics of search engine
  • Targeted advertising and the Google AdWords auction

Course Materials

 

ON-LINE ACCESS TO COURSE MATERIAL

Readings videos available on Coursera platform.

 

Teaching Methods

We combine online lectures, readings, on-line experiment and  webinars.

 

PREREQUISITEs

Prerequisites for this course are basic concepts in mathematics and in finance, which I will use during the course, and that I will assume you already know.  We expect you to know

 

  • What the Net Present Value of an investment project is.
  • How to compute the NPV using the appropriate opportunity cost of capital.
  • What probability is.
  • What a discrete random variable is, what is its distribution function how to compute its expected value.
  • What the binomial distribution is and how to use it.

Before you start this course please make sure you are familiar with these concepts.

Suggested readings to refresh these concepts

Capital Budgeting and Net Present Value

Basic probability theory

You might also  find the following videos instructive :

https://www.khanacademy.org/math/statistics-probability/probability-library#basic-theoretical-probability

https://www.khanacademy.org/math/statistics-probability/random-variables-stats-library#random-variables-discrete

https://www.khanacademy.org/math/statistics-probability/random-variables-stats-library#binomial-random-variables

 

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