Market behaviour under asymmetric information: Experimental evidence on ethical reminders

Asymmetric information is one of the market imperfections that can hinder achieving efficient market outcomes predicted by the competitive equilibrium model or might even lead to complete breakdown of markets. As a prevalent phenomenon in various contexts in daily market practices, asymmetric information can arise from uncertainties related to product features in the markets for consumption goods. Under these ex ante or ex post uncertain conditions of trade, final consumers, in their disadvantaged informational positions, face losses and damages as a result of adverse firm behaviour. Traditionally, competition and consumer policies stand out to tackle adverse market behaviour such as overcharging or undertreatment that cause welfare losses for consumers and the related literature mainly focuses on institutional arrangements in this context. The objective of this research is to incorporate market participants' behavioural features into policy discussions by including ethics as a new dimension. Drawing on the evidence from behavioural research and the relation between adverse market behaviour and dishonesty, this research aims to investigate the efficacy of ethical reminders to mitigate this welfare reducing behaviour in the market. In line with this objective, this research, as a method, uses experimental market environment with subjects randomly assigned to buyer and seller roles and adopts between-subjects factorial design in which one of the dimensions include levels of ethical reminders whereas the other dimension determines the level of information available in the market. The results of our study show that ethical reminders work better to mitigate overcharging or undertreatment when there is transparency and communication related to the uncertainty in the market. Considering the experience good characteristic of the experimental good in our research, we observe that overcharging or undertreatment is less severe in the repeated interactions that represent the long term market relations and on the other hand it is much higher when there is limited amount of interaction. Finally, our analyses show that the recall levels of reminders have no significant effect on pricing behaviour. Keywords: Asymmetric Information, Ethical Reminders, Market Experiments, Behavioural Policies