TV

[Photo by Jason Sewell]

Marketing gets a bad rap. There are plenty of bad feelings around advertising (often for good reason), and people tend to equate the two.

But good marketing isn’t bad men in dark suits bothering you. Marketing can add value.

Information asymmetry makes markets inefficient. Information asymmetry hurts everyone. Marketing can correct information asymmetry. Let me break that down.

Information Asymmetry Makes Markets Inefficient

I’ve mentioned information asymmetry before. It refers to when a buyer and seller do not share the same information, and therefore are unable to accurately value a product. It can work in either direction, but let’s use the example where the buyer doesn’t know the quality of a product.

Let’s say a buyer values a TV at $200 and, coincidentally, that’s also what it is on sale for. Great! But what if the buyer believes there is a 1 in 100 chance that the TV will be a dud? He won’t be willing to pay as much, to account for the chance he’ll end up out $200 and a TV, whether or not his belief is true.

Market Inefficiency Hurts Everyone

The difference in how the buyer and seller value the TV cuts into either the seller’s profits or the buyer’s derived value. In the worst case, it stops the sale altogether.

In a world of thin margins, if the expected outcome of a buyer lowers the value of a product below the inherent value believed to exist by the seller (the cost), the seller will not be willing to sell his product.

In our example, let’s say that the belief that 1 in 100 TVs is a dud is false. The buyer, who no longer values the TV at $200, will not pay that price. The transaction does not happen. This hurts the buyer AND the seller.

Marketing Can Correct Information Asymmetry

There are some kinds of marketing that immediately jump out as useful. What if the seller offered a contractually bound money-back guarantee? The buyer should feel confident in paying the full price, as a dud could be returned or exchanged for a working product.

There are also less obvious methods. What if the brand used marketing to increase it’s trustworthiness? The buyer might no longer believe there was a chance the product could be a dud. Remember, in our example there really are no duds, so this is good for the buyer (and the seller, who gets to make the sale).

Where have you seen this effect in your day-to-day life?

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