Informational Asymmetry

Refers, particularly in negotiation, to the greater level of information about the value of a transaction that one party in the negotiation possesses. Typically, this arises when one party is a more frequent participant in the market than the other, and hence has more knowledge about market prices and values or competitive information, or alternately, when one party participates at more levels of the market than the other.

A classic example is in the real-estate market where the real estate agent (or realtor) is regularly selling or offering to sell property, whereas the typical buyer is only an episodic and infrequent market participant. In addition, the real estate agent knows of other potential buyers and the size of their likely budgets, as well as having direct knowledge of the vendor’s actual bottom line. This places the real estate agent at a substantial negotiating advantage.

Almost all negotiations are effected to a lesser or greater degree by informational asymmetry, the key to successful negotiation is to recognize what the asymmetries are, and to use research and other techniques to reduce their impact.

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