How will advances in information technologies mitigate asymmetric information issues, affect firm pricing strategies and market competition?
Introduction
The advancement of information technology gives rise to the innovation and high competition (Lambert et al., 2011). At the same time, it also affects the company ability to mitigate the imperfect information. It is because IT technology provides high access to information to people which allow them to take a decision after analyzing the particular issues. Based on this, it can be stated that mitigation of asymmetric information tends to be positive as well as negative in the areas of increasing market competition and firm pricing strategies. In regards to this, the report will analyze the advances of IT in the retail sector and its impact on the mitigation of asymmetric information issues (Yan and Pei, 2011). Furthermore, the study also covers IT effect on the firm pricing strategies and market competition.
Basic concept in the economies of imperfect information
The concept of economies of imperfect information holds that such situation arises when one party has less information related to the transaction and different information from another party. This makes the transaction irrelevant and inappropriate. In regards to this concept, there is a lot of issues related to imperfect information is occurred retail industry when there is lack of technology advancement (Halov and Heider, 2011). Initially, customers have less information or awareness about product quality, ingredients then, in that case, they buy the product based on price. Thus, the less availability and knowledge about the product makes imperfect information situation. In previous times, such condition occurs mostly in the retail sector.
In the views of Berger et al., (2011), the problem of information failure arises at the time of two basic situations. Firstly, when both the parties who perform the transaction has less knowledge about particular product or service while it may also arise when one party in economic exchange knows much more as compared to another one. This condition could also refer to asymmetric information or unbalanced information. Moreover, Lewis (2011) stated that the imperfect information condition is still growing in the area of foreign exchange. However, the frequent changes in technology, economy affect the currency exchange rate. Sometimes, companies make a transaction on the past rate of currency without knowing the actual and current rate of currency exchange (Wenzel, 2011). This influences the company productivity. At the end, it is also identified that the imperfect information does not prove to be effective for the economic growth.
Asymmetric Information shape the institution, rules and regulation governing the retail industry
The theory of information asymmetry stated that the decision based on partial facts in the transaction between the buyer and seller always proves to be inappropriate or loss for the one party. In context to the retail industry, there is a problem related to asymmetric information is quite common as merchants have high advantage to hide certain facts from buyers in order to influences their buying decision. It is a fact that every seller never reveals all facts of product & services as they tend to hide some negative points of product so that they make customer perceive all the positive aspect of the product (Chen et al., 2010). In regards to study, it can say that the unbalanced distribution of information still exists in the market. Other than that, information asymmetry is also influencing the price strategies. This done by the side of seller through collects full information about consumers. Based on the collected information, they set or decide the price of product or service. But it hides crucial information about the product from the customer and leaves customer into the confusion. The consumer with limited resources takes purchase decision. This study clearly indicates that unbiased information always contributes loss for another party. At the same time, the asymmetric information issue is also proving to be negative for the economic development as honest businessmen sold the quality product & service at the reasonable price would affect from the manipulated party like traders but it is for sometimes. This is because quality product always stays forever and this reveals the actual facts of product. This practice affects the traders adversely. Moreover, the decrease in quality, inefficiency in the product does not strengthen the economy. Hence, asymmetric information issue does not gather benefits for the customers, companies and economic development.
For example, several years later at UK store, the seller sales the expiry product and merchandise which has less than 100% quality (Nicolau and Sellers, 2010). In this situation, the presence of imperfect information becomes a cause for declining in price or quantities of sold goods. So, this case clearly shows the asymmetric information in which customer has no information about goods compare to traders. So, in such situation, there is need to have incentive as a mechanism so that they both achieve mutual benefits even in the phase of imperfect information.
Effective mechanism for eliminating the asymmetric information issue in retail industry
In accordance with economic theory, asymmetric information is considered as problematic when it leads to select the right product. To compensate the lack of information, the retail store focuses the advancement of IT mechanism for eliminating the issues (Hung et al., 2010). In this, the CRM, ERP software helps the customer to get the detailed understanding of the product and services. Now-a-days, the IT system also provides the facility of a bar-code reader in which customer by tracking the product bar code through the machine and identifies the entire information of the product. The facts include number of ingredients, price, benefits, manufacturing date and areas where the product does not work etc. this is innovative technology which is used widely by the consumers with the aim to judge the quality.
Besides that, digital platform is another popular advanced technology mechanism which contributes towards eradication of asymmetric information issue. However, companies like Tesco use the digital platform to provide the clear facts to customer and such practices is also adopted by the companies in order to develop trust and faith over the consumer. It is fact that in this tough competition without achieves the customer loyalty then it becomes difficult to stay in the market. That’s why retail company’s concentrates on the digital platform to communicate all facts related to the product to the customer (Denegri‐Knott and Molesworth, 2010). This action of the company helps to reduce the situation of imperfect information.
In addition to this, the growing competition with technology gives also consumer several choices about to select which product quality. Though previously customer does not have many options so they compromise it but with the technology advancement, customer matches the price, feature, and quality over the internet of different company product. This action of consumer results in a positive transaction which provides profit to both parties (Haight and Polasky, 2010). Therefore, the advancement of technology offers various effective mechanism which supports to alleviate the asymmetric information issue.
Impact of Information Technology mechanism on the pricing strategy or competition level in context to Retail Industry
There is huge impact occurs in the retail price of product & service with the advancement of technology. Since, consumer access the details of the product and its quality, traders charge the actual price of the product. The trader charges the price of the product as per the manufacturing cost and operating cost without compensating the quality. So, it is stated that price of the product might depreciate (McWilliams and Siegel, 2011). But on the other hand, due to the involvement of technology practices, the cost of the product also increases which could make appreciate the actual price of the product. It is a case of vice-versa.
It is identified that the rising technology contributes a high level of competition in the retail industry. The technological development allows for accessing best information about the product such as quality, worker performances, and transaction. So the increasing ability to gather and analyze information make other retain companies to enter the market with some innovative features. For instances, currently, there are various companies which enter into retail sector by offering health-related product due to increasing environmental and health issues. The consumers also prefer to use such innovative product rather than a conventional product. Thus, in such way, technology development gives rise to the high competition.
The increasing competition also shapes the pricing strategy. Likewise, companies move more towards the competitive pricing as retailers considering the competitive pricing strategy to stand above in competition. Under competitive pricing strategy, retailer put the price below or above than competitor price (Hasan and Bhargava, 2013). Likewise, if competitor charges the high price for a product then company charge less price through cutting maximum cost while company through offering unique service to the customer then sell the product at the high price. Thus, with this manner, the technology affects the price discrimination.
In addition to pricing strategy, Grewal et al., (2011) identified that the advancement of technology provides various solutions in the form of CRM system, digital platform, and social sites. This contributes to access the customer needs. Based on such information technology, the company saves the research and marketing cost which could add value for the company in regards to reduce the price of a product without compensating quality. Other than that, it is also true that high technology is one of the cause due to which competition in the retail market is increased. The growing technology promotes the e-business and this allows the young people to enter easily into the digital platform with an innovative idea. It makes them successful and put pressure on the existing companies. Hence, this study signifies that the technology enhancement impacts the price of product and services. Similarly, it also becomes a cause of increasing competition in the retail sector.
Analyse the impact of passing the information asymmetries over the retail industry
The passing of information asymmetries tends to prove negative for retail companies as if trader communicate the partial information about the product & service then the customer couldn’t take interest in the product. It is because now consumer buys only those products which define their all sides including negative and positive (Ho-Dac et al., 2013). Moreover, the passing of imperfect information also creates the issue of adverse selection and moral hazard. It can be understood as the example of the retail store. Generally, market participant such as seller or buyer has a different set of understanding and knowledge about product & service. Between them, the seller has more information about the hidden or unobservable quality of the product. If the individual does not like to communicate the true quality of product with the aim to sell the product then the buyer draws the wrong product. Thus, such adverse selection arises in market transaction impacts the negatively for economic growth.
In addition to this, the imperfect information also impacts the goodwill of company especially in case of retail products. The retail sector could attract customer on the basis of product quality and features even in that only trader provide wrong information then it spreads negative word of mouth among the target market. It directly impacts the goodwill and customer faith & trust over the company.
From this study, it is analyzed that asymmetric information gives the short-term benefit in the form of achieves high sales but not contributing towards increasing customer base (Hong and Pavlou, 2014). Thus, it is rightly said that retailer only gets short-term profits rather than long-term profits with the imperfect information. So, it becomes crucial for the sector to eliminate the asymmetric information issue in order to retain large customer loyalty.
From the above discussion, it is concluded that imperfect information is considered as moral hazard which is against to the ethical business trading practice. It is important that transaction would be carried out without involving any ill-practices. So in this regards, the advancement of technology is well suited to eliminate the asymmetric information issue. However, technology development gives rise to CRM, digital sites and such platform help the customer to get aware of the product & services. But at the same time, it also affects the pricing strategy or competition level of retail companies.
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