Freakonomics, Information Asymmetry, and the Internet

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FreakonomicsSteven D. Levitt and Stephen J. Dubner’s book Freakonomics is well-known as an introduction to actually interesting and useful microeconomic views on the world — not like that “rational actor” nonsense they fed you in college. I thoroughly enjoyed the book and have appreciated seeing a boom in livelier economics writing in its wake. It almost feels as though economics has become hip or something — quite a turn.

I was surprised, though, when I read this section from chapter two, which talks about the imbalance of information between real estate agents, and the home buyers and sellers who rely on agents to represent their interests:

It is common for one party to a transaction to have better information than another party. In the parlance of economists, such a case is known as an information asymmetry. We accept as a verity of capitalism that someone (usually an expert) knows more than someone else (usually a consumer). But information asymmetries everywhere have in fact been mortally wounded by the Internet.

Information is the currency of the Internet. As a medium, the Internet is brilliantly efficient at shifting information from the hand of those who have it into the hands of those who do not. Often […] the information existed but in a woefully scattered way. (In such instances, the Internet acts like a gigantic horseshoe magnet waved over an endless sea of haystacks, plucking the needle out of each one.) […] The Internet has accomplished what no consumer advocate could: it has vastly shrunk the gap between the experts and the public.

In the specific case of real estate agents, I posted a few weeks ago about how true this is — the Internet has been doing an excellent job of connecting home buyers and sellers to information they previously would not have had, at least not easily. Yet, I think Levitt and Dubner dramatically overstate the “mortal blow” information asymmetries have been dealt. It seems to me, instead, that specific industries have been signficantly changed, but that the overall consumer experience is still the same, and that many industries haven’t been affected, or hardly at all.

Unquestionably, it is much easier to compare prices for products — new products through review sites, like Amazon and Shopzilla, and used products particularly through eBay. Likewise, specific markets, like cars, travel, and real estate, have seen significant changes in their pricing power through the development of Internet companies such as Edmunds, Orbitz, Farecast, Zillow, and Redfin. Some very general review sites, such as Yelp and Judy’s Book, are taking on five-star reviews of local businesses of a wide variety.

But does this add up to a mortal blow for information asymmetry? Let’s take a look at a specific example for a moment: auto repair. Yes, the Internet can help you get a new car with much better pricing information than ever before. But what about getting your car serviced? Assume the warranty has expired, and you actually have a choice of where to take your car for service — the dealership, or an independent shop. Does the Internet — search engines, or specific sites — make it possible for you to find a good auto shop without having to be a car expert? Can you compare the price and satisfaction you should expect?

I looked up a BMW auto shop in Berkeley, California (where I live) by the name of Bavarian Professionals. (As it turns out, they’re a fantastic shop, and I highly recommend them if you’re in the area.) I wondered what I could find out about this shop if I didn’t already know they do excellent work:

Almost all of these sites also included the address and phone number for the shop, and a couple showed a map. The Better Business Bureau did not publish information on the Internet about this business, and if there are other relevant sites with good information about them, I couldn’t find them. These searches did turn up some other information — for instance, the New York Times wedding announcement for the general manager (belated congrats, Mr. Sears!) — performing, as Freakonomics claimed, as a giant magnet for any and all information about this shop. But none of these searches helped me make a better decision or comparison between Bavarian Professionals and the dealership — the only comparison I was able to make was using five-star ratings scattered across many sites.

So, what did the Internet get us, for all of our research on how to get our car fixed? An address, a bunch of stars and a few short reviews.

In this example, pricing information is completely absent. Not one of the reviews or ratings would give you any information around which to plan a budget or compare prices between shops. The information that is available — star ratings and reviews — only comes from those consumers so motivated to rant or rave about a business that they’ll take the time to find a good site for doing so, and then to voice their opinion. While each time I’ve been to Bavarian Professionals they seem to be servicing 10 or 20 cars, the largest number of reviews I could find on any site, even Yahoo!, was two.

Compare this to many of the other purchases you might make as a consumer: housing, groceries, restaurant meals, medical services, and so on. If you apply for a rental apartment, think about how much information the landlord can get on you (through your credit report and the like) versus how much you can get on them. Think about how much a grocery chain knows about your buying habits if you pay with your credit card, versus how much you know about them and their pricing. It seems like you should know more, since there are far fewer grocery stores than there are consumers who shop at grocery stores, but no. Consumers have no way to aggregate and compare information about our purchases for nearly all of the money we spend every day.

So, I don’t buy it — I don’t think the Internet, nor any site on the Internet, has yet dealt a mortal blow to information asymmetry. Businesses have access to far more, better structured, professionally collated information about you as a consumer — your credit rating, your salary history, demographic profiles of you, warranty cards you’ve completed, and so on — than you have access to about them as a business by a long shot, and that has not materially changed for nearly all industries. Pricing information is indeed flowing more freely, but satisfaction measurements are relegated to the five-star review Amazon perfected a decade ago, and those measurements have advanced no further. We need more.

I was already far down the road with Wesabe before I read Freakonomics, so I was surprised to read the paragraphs quoted above. Levitt and Dubner are definitely right about their general characterization of the power the Internet can bring to consumers, and should bring to consumers. I disagree with them only as to whether that power exists for consumers today. The raw material exists, but the “gigantic horseshoe magnet” doesn’t just appear — we have to make it happen, together.

5 Responses to “Freakonomics, Information Asymmetry, and the Internet”

  1. henry Says:

    You are so right. We just aren’t there yet with reliable comparision and information shopping.

  2. Marc Hedlund Says:

    Thanks, Henry.

    I should have mentioned in the post: I Am Not an Economist (IANAE) and may be misuing the term information asymmetry. I still think, though, that the seller selection problem I describe is real.

    Any economists want to correct my usage? Or is that not needed?

  3. Steven Alexander Says:

    I envision a web tool allowing consumers to plan counter-tactics against grocery stores by collecting price data over time and, e.g., suggesting how many packages of Oat Loops to buy now that Oat Loops (are|are not) on sale.

    Is this something wesabe.com may be up for?

    (Compare the mention of me from about 1993 at .)

  4. Sanjeev Sisodiya Says:

    I almost jumped out of my chair as I read your post. A couple of frustrating experiences shopping for services were the genesis for the idea of a web service which brought transparency to services prices.

    As you clearly identified one of the big issues is asymmetric access to pricing information. While there are many online services which provide price comparison for products, it’s incredibly hard to discover, broadly, what a reasonalbe price for a service should be in a given locality.

    There are really two groups who have access to this pricing information. The service providers themselves, and the consumers who pay for these services. Aggregating that data is an essential first step on the road to more financially empowered users.

    I’ve started the process at http://www.pricemarks.com. I’d love to hear what you think of it.

  5. bill evans Says:

    I agree that information asymmetry is still very common despite the proliferation of the Internet and I believe Levitt does in Freakonomics too. In it he says “the Internet has accomplished what no consumer advocate could: it has vastly shrunk the gap between the experts and the public.” Today that is undeniable. You say you “don’t buy it”. You don’t think the Internet has dealt a mortal blow to information asymmetry. Levitt doesn’t either. On the very next page of the paragraphs you have quoted, Levitt says “The Internet, powerful as it is, has hardly slain the beast that is information asymmetry.” He then gives the examples of corporate scandals involving the “sins of information.” It’s important not to take things out of context.

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