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Role of information and IT
Introduction to Service Science
© Leonard Walletzký

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What is the information?
* In common language
* Knowledge to be presented, content of the message, answer to a question
* In science
* Data on the properties, setting and arrangement of the object
* In informatics
* Coded data that can be sent, received, saved and processed by technical equipment

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Economics view to information
* Till 60s of 20th century
* Information are „perfect“
* All parties have same access to the information
* Information are public goods
* Some authors mentioned marginal problem to access information (Smith, Marshall, Keynes)
* 1961 – George Stigler – Economics of information
* Information is valuable source
* First try to set the price mechanism

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Economics of information
* Perfect information
* All participants of the game can see the cards of others as well as the undistributed cards in
the package
* Incomplete information
* All participants have the same information, but no-one has information advantage
* All participants can see cards of the others, but undistributed cards are hidden
* Asymmetric information
* All participants can see only their cards
* Some information is private

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Economics of information
* The game theory – one of the sources of analysis
* Imperfect information
* One player does not know the behavior of the others
* Incomplete information
* One or more players do not know one or more aspects of the game rules, necessary for their
decisions

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Stigler's model
* Seniors game
* Where to buy a particular good for the cheapest price
* Assumptions
* The buyer knows all shops, where he can buy this product
* The buyer does not know the prices in the shops
* The buyer is willing to invest some costs to find the information about the cheapest price
* The amounts of those costs are limited
* What do we do now to solve this problem?

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The searching costs
* The valuation of the time, needed for the finding of the information
* The costs for the searching must be same or less than expected profit
* Conclusions
* The costs for the searching are individual
* The reduction of the problem to the price difference is wrong
* The value is also important
* The analysis of the problem is too simple
* IT rapidly decline the searching costs

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Quality of information
* If you are buying some product or services, how you can be sure about its quality?
* Guarantee
* Insurance for the product failure
* Impulse for the producer to improve the quality
* Has information value – indicator of the product quality
* Direct influence to the producer reputation
* Selecting (extended) guarantee can be used for the customer discrimination

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Moral hazard
* a tendency to take undue risks because the costs are not borne by the party taking the risk
* The customer is able to affect an event he is insured against, but the seller has no power to
monitor or affect this event.
* Insurance company do not know how you use your car
* ERP supplier has limited information about customers IT security
* Double moral hazard
* Supplier gives only limited or minimal guarantee
* Customers information about product quality is limited

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The market of Lemons
* Author G. Akerlof
* Lemon = used car
* Main assumption
* Every used car has hidden defect
* If it would not have, the owner should use it instead of selling it
* The owner of the good car is not motivated to sell the car
* The quality of used cars on the market is very low

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Conclusion for Lemons market
* The price for the comparable cars will be the same
* The buyer has limited possibilities to recognize the real quality of the car
* If the quality of offered cars would drop under level of the price, the market would be empty

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Auctions models
* Situations
* Monopolist sells a special kind of product or good (art)
* Not able to estimate the value for the buyer
* To declare a price
* Someone is willing to pay more
* Monopson buys a special kind of the service
* Not able to estimate the real costs
* To declare a price
* Someone is willing to deliver the service cheaper
* Solution
* Move the asymmetry to the other part of market

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Types of auctions
* With common value of the product
* Each participant has his own value of the product
* Participant do not know the valuation of each other
* With independent private value of the product
* There is only one objective value of the product
* Nobody knows it

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Auctions with independent value
* English auction
* The price grows according to the orders
* The highest price wins
* Dutch auction
* The price is set on the highest lever
* The price is reduced
* The first call wins

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Auctions with independent value
* Closed auctions
* The offers are given before
* the first price auction
* The highest or the lowest price wins
* The second price auction
* The highest and lowest offer are excluded
* The second highest or lowest offer wins