Chapter 12

The Economic of
Informations
Azmil Muftaqor Imami
Bramantyo Cipta Adi
Dody Budiarso
Muhammad Wira'i Suryajati
Learning Objectives

LO1Identify strategies to manage risk and uncertainty, including diversification and optimal search
strategies.

LO2Calculate the profit-maximizing output and price in an environment of uncertainty.

LO3Explain why asymmetric information about “hidden actions” or “hidden characteristics” can lead
to moral hazard and adverse selection, and identify strategies for mitigating these potential
problems.

LO4Explain how differing auction rules and information structures impact the incentives in auctions,
and determine the optimal bidding strategies.
The Mean and The Variance
• Mean (expected value) : The sum of the probabilities that different outcomes will occur multiplied by the

resulting payoffs.

• The Expected value of average of a random variable.

• Computed as the sum of the probabilities that different outcomes will occur multiplied by the resulting

payoffs: E[x] = q1 x1 + q2 x2 +…+qn xn,

where xi is payoff i, qi is the probability that payoff i occurs, and q1 + q2 +…+qn = 1.

• The mean provides information about the average value of a random variable but yields no information about

the degree of risk associated with the random variable.

The Mean and The Variance
For example, suppose someone promises to pay you (in dollars) whatever number comes
up when a fair die is tossed. If x represents the payment to you, it is clear that you cannot
be sure how much you will be paid. If you are lucky, you will roll a 6 and be paid $6. If
you are unlucky, you will roll a 1 and receive $1. The probability that any number between
1 and 6 is rolled is 1/6 because there are six sides on the die. The
expected value (or mean) of x is given by

In other words, even though you do not know for certain how much you will be paid when
you roll the die, on average you will earn $3.50.
The Variance & Standard Deviation

• The Variance : The sum of the probabilities that different outcomes will
occur multiplied by the squared deviations from the mean of the resulting
payoffs.

s2 = q1 (x1- E[x])2 + q2 (x2- E[x])2 +…+qn(xn- E[x])2

• Standard Deviation : The square root of the variance

Demonstration Problem

Problem :
The manager of XYZ Company is introducing a new product that will yield $1,000 in profits if the
economy does not go into a recession. However, if a recession occurs, demand for the normal good
will fall so sharply that the company will lose $4,000. If economists project that there is a 10 percent
chance the economy will go into a recession, what are the expected profits to XYZ Company of
introducing the new product? How risky is the introduction of the new product?
The Variance & Standard Deviation

Answer :
If there is a 10 percent chance of a recession, there is a 90 percent chance that there will
not be a recession. Using the formula for the expected value of a random variable, the
expected profits of introducing the new product are found to be
E[x] = q1x1 + q2x2 = .1(-$4,000) + .9($1,000) = $500
Thus, the expected profits of introducing the new product are $500. Using variance as a
measure of risk, σ2 = .1(-4,000 - 500)2 + .9(1,000 - 500)2 = 2,250,000
Uncertainty and Consumer Behavior
• Risk averse : Preferring a sure amount of $M to a risky prospect with
an expected value of $M.

• Risk loving : Preferring a risky prospect with an expected value of $M

to a sure amount of $M.

• Risk neutral : Indifferent between a risky prospect with an expected

value of $M and a sure amount of $M.
Managerial Decission with Risk-Averse Consumers

• Product Quality :
• Informative advertising
• Free samples
• Guarantees

• Chain Stores

• Online Reviews

• Insurance
Uncertainty and Consumer Behavior

Consumer Search
• Consumers face numerous stores selling identical
products, but charge different prices.

• The consumer wants to purchase the product at the

lowest possible price, but also incurs a cost, c, to acquire
price information.
Uncertainty and Consumer Behavior

Consumer Search
• The reservation price, R, is the price at which the consumer is indifferent between purchasing
at that price and searching for a lower price.

• Formally, if EB(p) is the expected benefit of searching for a price lower than p and c
represents the cost per search, the reservation price satisfies the condition EB(R) = c

• The optimal search rule is such that the consumer rejects prices above the reservation price
(R) and accepts prices below the reservation price.
Uncertainty and Consumer Behavior
• If the consumer finds a price higher than R, the expected
benefits of searching are greater than the cost, and the consumer
should reject this price (continue to search for a lower price)

• If the consumer locates a price below R, it is best to accept this

price (stop searching and purchase the product).

• If the consumer located a price of R, she would be indifferent

between purchasing at that price and continuing to search for a
lower price (Reservation Price).
Uncertainty and Consumer Behavior

• An increase in search cost shifts up the horizontal

line to c*, resulting in a higher reservation price
R*

• If the cost of searching for lower price falls, the

consumer will search more heavily for lower
prices.
 Uncertainty and The Firm

Risk Aversion
• A manager who is risk neutral is interested in maximizing expected profits; the
variance of profits does not affect a risk-neutral’s manager decisions.
• If the manager is risk averse, he or she may prefer a risky project with a lower
expected value if it has lower risk than one with higher expected value.
Uncertainty and The Firm

Diversification
By investing in multiple projects, the manager may be able to reduce

risk. “Don’t put all your eggs in one basket”

Producer Search
Just as consumers search for stores charging low prices, producers
search for low prices of inputs. The search strategy for a risk-neutral
manager will be precisely the same as that of risk-neutral consumer.
 Uncertainty and The Firm

Profit Maximization
To maximize expected profits, the manager should equate expected marginal
revenue with marginal cost in setting output:

 
E[MR] = MC
Example:
Appleway Industries produces apple juice and sells it in a competitive market. The firm’s manager must determine
how much juice to produce before he knows what the market (competitive) price will be. Economists estimate that
there is a 30 percent chance the market price will be $2 per gallon and a 70 percent chance it will be $1 when the juice
hits the market. If the firm’s cost function is C = 200 + 0.0005, how much juice should be produced to maximize
expected profits? What are the expected profits of Appleway Industries?
 Uncertainty and The Firm
• 
Answer:
Profits of Appleway
Marginal revenue MR = p and Marginal cost MC = 0,001Q
To maximize expected profits, E[p] = 0,001Q
Expected price is given by E[p] = 0,3(2) + 0,7(1) = 0,60 +0,70 = $1,30
Equating with marginal cost, we obtain 1,30 = 0,001Q, we find Q = 1300 galloons
E[π] = E[p]Q – 200 – 0,0005= 1,30(1300) – 200 – 0,0005 = $645
Thus, Appleway Industries can expect to make $645 in profits.
 Uncertainty and the Market

Uncertainty can profoundly impact market’s abilities to efficiently

allocate resources.
• Asymmetric Information
• Signaling and Screening
 Asymmetric Information
Situation that exists when some people have better information than
others. The people with least information may choose not to participate
in a market.
Between consumers and firms Asymmetric Information can affect firm’s
profit.
• Firms invest in a new product that it knows it is superior to existing products on market.
• Consumers do not know if product is truly superior or firm is falsely claiming superiority.
• If degree of asymmetric information is severe, consumers may refuse to buy product.

Between consumers and firms Asymmetric Information can affect firm’s

profit.
• Job applicants have much better information about their own capabilities than the
manager hiring new workers.
• That’s why firms spend tons of money designing tests to evaluate job applicants,
background checks.
 Two Types of Asymmetric Information
• Adverse Selection
Situation where individuals have hidden characteristics (things one party to a transaction knows about
itself, but which are unknown by the other party) and in which a selection process results in a pool of
individuals with undesirable.
e.g. Used car seller knows more about the condition of the car than the buyer.

• Moral Hazard
Situation where one party to a contract takes a hidden action (actions taken by one party in a
relationship that cannot be observed by the other party) that benefits him or her at the
expense of another party
e.g. a worker knows more than her manager about how much effort she put into her work.
Adverse selection
Adverse selection arises from hidden characteristics.
Refers to a situation where a selection process results in a pool of individuals with
economically undesirable characteristics.
Adverse Selection and the Used Car Market:
• The seller knows more than the buyer about the quality of the car being sold.
• Owners of “lemons” more likely to put their vehicles up for sale.
• Owners of good used cars less likely to get a fair price, so may not bother trying to sell.
• Buyers are afraid of getting a ‘lemon’
• Many people avoid buying used cars
• Buyer of a used car may conclude that seller knows something about the car that is why they
are trying to get rid of it.
• Subsequently, they’d want to pay a low price for it
In this examples, the information asymmetry prevents some mutually beneficial trades.
Moral Hazard
Hidden Actions generally lead to Moral Hazard situation where one party
to a contract takes a hidden action
In a moral hazard situation, one party entering into the agreement
provides misleading information or changes their behavior after the
agreement has been made because they believe that they won't face any
consequences for their actions.
• The tendency of a person who is imperfectly monitored to engage in
dishonest or otherwise undesirable behavior
• Agent performs a task on behalf of the principal
• Principal cannot monitor agent perfectly
• Agent expends less effort at task than principal considers appropriate.
Possible Solutions to prevent Moral Hazard
Principal tries several methods to encourage agent to act more appropriately:
e.x. Worker/Manager
1. Better monitoring: hidden videos by managers for workers and by parents for
babysitters. Aim is to catch irresponsible behaviour
2. Offering higher than equilibrium wages: If worker plays on the job and is caught
and fired, they might be able to get another high-paying job
3. Delayed Payment: keeping part of compensation so if worker is caught shirking
she loses a lot. E.g. year end bonuses or paying workers more later in their
lives. Income increase as you age on the job
Market Responses (Possible Solutions) to Asymmetric Information are:
Signaling and Screening
Signaling
• An attempt by an informed party to send an observable indicator of his or her
hidden characteristics to an uninformed party.
• To work, the signal must not be easily mimicked by other types.
Screening
• An attempt by an uninformed party to sort individuals according to their
characteristics.
• Often accomplished through a self-selection device. A mechanism in which
informed parties are presented with a set of options, and the options they choose
reveals their hidden characteristics to an uninformed party.
Signaling
To be an effective signal, signal must be costly, if signaling is free,
everyone would use it and it’d convey no information.
Example:
A talented person can get through college more easily than a less
talented person. So it is rational for a talented person to pay for the
cost of the education (signal) and it is rational for employers to use that
signal as information about the talent of the person.
The reason explains why graduates of elite schools always make sure
that it is known to employers.
Gifts as signals
• Giver has private information that receiver would like to know (Asymmetric
information)
• Characteristic of the gift is a signal.
• Has to be costly (takes time) and its cost depends on the private information.
Example:
Cash gift for a girlfriend versus cash from parents to their college kids.
Screening
• Attempt by an uninformed party to sort individuals according to their
characteristics.
• Often accomplished through a self-selection device. A mechanism in
which informed parties are presented with a set of options, and the
options they choose reveals their hidden characteristics to an
uninformed party.
Example:
Buyer of a used car requires inspection by a mechanic. If seller refuses,
then buyer knows it’s a lemon
 Lelang
• Kegunaan :
• Karya Seni
• Surat Perbendaharaan
• Furniture
• Real Estate
• Pertambangan Minyak
• Barang-barang di internet (ebay, dsb)
 Lelang
• Tipe Lelang
• English (Ascending-Bid)
• First Price (Sealed-Bid)
• Second Price (Sealed-Bid)
• Ducth (Descending-Bid)
• Lelang ini berbeda dalam hal:
• waktu keputusan penawar (apakah tawaran dibuat secara bersamaan
atau berurutan)
• jumlah yang harus dibayar pemenang
English Auction
• Barang akan di jual kepada penawar tertinggi
• Tawaran terus meningkat secara berurutan
• Penawar terus menerus mendapatkan informasi tentang tawaran satu sama lain
sehingga dapat menaikkan tawaran ketika barang tersebut bernilai lebih dari
tawaran tertinggi saat itu.
• Contoh : Lelang Mesin Kopi
Perusahaan Menilai Mesin Kopi :
• A = $ 1 jt
• B = $ 2 jt  pemenang lelang (hanya dengan memberikan tawaran $1,51)
• C = $ 1,5 jt
 First Price, Sealed-Bid Auction

• Penawar menulis di selembar kertas

• Lelang bersifat tertutup (penawar tidak saling tahu angka penawaran
yang di tuliskan satu sama lain)
• Barang dijual kepada penawar tertinggi
• Penawar tertinggi membayarkan sesuai dengan angka yang di tulis di
kertas
 Second Price, Sealed-Bid Auction

• Lelang penawaran tertutup (sama dengan first price auctions)

dan dijual kepada penawar tertinggi.
• Membayar sebesar tawaran yang di ajukan oleh penawar
tertinggi kedua.
 Dutch Auction
• Mulai dengan harga sangat tinggi

• Bertahap menurunkan harga barang sampai dengan ada pembeli yang menunjukkan
kesediaan nya untuk membeli dengan harga tersebut.
• Informasi yang tersedia bagi penawar sama hal nya dengan informasi dalam lelang
Price First-Sealed Bid.
• Secara strategis sama dengan Price First-Sealed Bid

• Dalam hal perilaku penawaran yang optimal dan keuntungan yang diperoleh juru
lelang, Dutch Auction dan First Price identik
Struktur Informasi
• Perfect Information
• Jarang penawar dalam lelang mengetahui informasi yang sempurna
• Informasi Asimetris
• Independent Private Values
• Nilai independent mengacu pada fakta bawah nilai barang bagi penawar
individu di tentukan oleh selera pribadi yang hanya di ketahui oleh
penawar tersebut.
• Informasi Asimetris
• Penilaian atas barang tersebut tidak bergantung pada orang lain.
Struktur Informasi
• Correlated Value Estimates
• Setiap penawar tidak tahu benar nilai dari sebuah barang yang di lelang
• Perkiraan nilai yang ber afiliasi : semakin tinggi estimasi nilai penawar,
semakin besar kemungkinan penawar lain juga memiliki estimasi yang
tinggi.
• Common values : muncul ketika nilai sebenar nya yang mendasari item
tersebut sama untuk semua penawar.
Strategi Penawaran Optimal Untuk Penawar Netral Bebas Resiko

• Bergantung pada jenis lelang

• Bergantung pada informasi yang tersedia

Strategi Penawaran Optimal Untuk Lelang Inggris

• Tetap aktif sampai harga melebihi penilaian nya sendiri atas
objek tersebut
Strategi Penawaran Optimal Untuk Penawar Netral Bebas Resiko

Strategi Penawaran Optimal Untuk Second Price Sealed Bid

Penawaran tertutup dengan nilai pribadi independent
• Pemain menawar sendiri valuasi nya atas item tersebut
• Strategi yang dominan :
 Anda tidak membayar tawaran Anda sendiri, jadi menawar kurang dari
nilai Anda hanya meningkatkan peluang Anda tidak menang.
 Jika Anda menawar lebih dari penilaian Anda, Anda berisiko membeli
barang itu lebih dari nilainya bagi Anda
Strategi Penawaran Optimal Untuk Penawar Netral Bebas Resiko

• 
Strategi Penawaran Optimal Untuk First Price, Sealed Bid
• Semakin kompetitif pelelangan (yaitu semakin besar jumlah penawar lainnya),
semakin dekat seorang pemain harus menawar dengan penilaian yang sebenarnya.
• Strategi optimal penawar adalah menawar kurang daripada valuasinya atas item
tersebut. Jika ada penawar (n) yang semuanya menganggap valuasinya merata (atau
seragam) antara valuasi terendah (L) dan valuasi tertinggi (H), maka tawaran
optimal untuk pemain (b) yang valuasinya sendiri (v) adalah :
Contoh Strategi Penawaran Optimal
Pertimbangkan lelang di mana penawar memiliki nilai pribadi independen.
Setiap bidder melihat bahwa valuasinya didistribusikan secara merata antara
$1 dan $10. Sam tahu penilaiannya sendiri adalah $2. Tentukan strategi
penawaran Sam yang optimal di :
(1) lelang harga pertama, penawaran tertutup dengan dua penawar
(2) lelang Belanda dengan tiga penawar
(3) lelang harga kedua, lelang tertutup dengan 20 penawar.
 Contoh Strategi Penawaran Optimal
 Jawaban : •  Karena lelang Belanda secara strategis setara
1. Dengan hanya dua penawar, n = 2.
Penilaian serendah mungkin L = $1
Penilaian Sam sendiri adalah v = $2.
Penawaran optimal Sam adalah
2.
dengan lelang harga pertama, penawaran
tertutup, kita dapat menggunakan rumus
tersebut. Jika n = 3 maka :
• Strategi optimal Sam adalah membiarkan
juru lelang terus menurunkan harga hingga
mencapai $ 1,67 dan kemudian berteriak,
"Milikku!"
Contoh Strategi Penawaran Optimal
Jawaban :
3. Sam harus menawar valuasi yang sebenarnya, yaitu $2.
Sesuai dengan teori strategi dominan dimana strategi optimal pemain
adalah menawar valuasi nya sendiri atas item tersebut.
Strategi Penawaran Optimal Untuk Coorelated Values Auctions

• Susah untuk dijelaskan:

• Bidder tidak tahu valuasi nya sendiri atas barang tersebut apalagi
valuasi nya orang lain
• Proses lelang dapat mengungkapkan informasi tentang seberapa besar
nilai penawar lain terhadap barang tersebut.
• Penawaran yang optimal mengharuskan pemain menggunakan
informasi ini untuk memperbarui perkiraan nilai mereka
sendiri selama proses lelang.
 Winner’s Cursed
• adalah kecenderungan tawaran tertinggi pada lelang melebihi nilai pasar
sebenarnya dari item yang dilelang
• terjadi ketika penawar membeli aset dengan harga lebih besar dari nilai yang
akhirnya direalisasikan dari asset
• Pemenang nya adalah penawar yang paling optimis tentang nilai sebenar nya
dari item tersebut.
• Untuk menghindari kutukan pemenang, penawar harus merevisi ke bawah
estimasi pribadi nya dari nilai untuk memperhitungkan fakta ini.
• Kutukan pemenang ini paling sering terjadi / menonjol pada lelang tertutup
Winner’s Cursed