Information advantage in transactions and relationships will be overturned by big data
One of the most powerful outcomes of big data is the decline of information asymmetry, where one party in a transaction or relationship has an informational advantage over the other. Will the rise of big data spell the end of that imbalance?
Consider the case of used car sales, where the huckster car dealer had a huge advantage over the relatively uninformed customer. George Akerof is well known for his work in the 1970s in this area. As he pointed out, sellers had better information — accident history, cost of parts, etc — while buyers may only know the price. His thesis was that buyers would only pay the average price for a car, so why would a buyer want to sell a car of greater than average quality: a so-called plum? As a result, the plums leave the market and the average quality falls lower, creating a ‘market for lemons’.
As Alex Tabarrok and Tyler Cohen have pointed out (in The End of Asymmetric Information), the market for used cars has been a shining example of market regulation and competition countering information asymmetry:
Odometers — odometers were standard on most cars as early as 1925, and state and federal regulations made it illegal to tamper with odometers to conceal mileage. As a result, the odometer became the ‘the single most important piece of information about a specific car that determines its value, and that is why used car prices are adjusted for mileage’. The Truth in Mileage Act of 1986 requires that sellers disclose and record odometerreadins at each sale. Today, odometer readings are made at each safety inspection and emissions test.
Other data — Services like Carfax record odometer data and information from insurance companies and car repair shops about accidents and repairs. Also, we now have ‘black boxes’ tapping the telemetric information of today’s circuit-rich cars through the On Board Diagnostic (OBD) port, like braking, acceleration, speed, location, air bag deployment, and use of horn and radio. Insurance companies are beginning to use that data — with customer permission — to monitor driving behavior, as a reservoir of data about the stresses and strains the car is subjected to. And the data is increasingly being exposed to potential buyers so that plums are sold at a fair price, along with the lemons, and of course, the black box data transfer to the new owner at each sale.
Continuing on the car market, car owners might freeload on the insurance market by insuring their car and then driving recklessly. This is why insurance companies have a deductible. But on a more proactive basis insurance companies offer ‘good driver’ reduced premiums, based on the way that the drivers drive, all delivered from internet-connected devices that tap into the OBD. Those that drive less, in the daytime, with less sharp breaking can receive lower rates.
UPS estimates that a savings of one minute per day per driver increases profits by $14.5 million each year, and as a result UPS has a serious motivation to optimize its routes.
Note that this information can also be used by the owner to monitor nearly every useful bit of car information, by tagging into that data via smartphone. This can head off problems early, and get the car to the shop before a problem leads to extensive — and expensive — repairs. This can also serve as another sort of information asymmetry, when the car owner might be in the dark regarding the state of the car relative to the car repair shop that formerly could use their access to the OBD as a bargain chip in negotiations.
We are likely to see many other areas where information asymmetry will be overturned by new sorts of big data. Consider the impacts of monitoring workers in the workplace, where historically management might not really know much about what people are doing hour by hour, and some workers might exploit that advantage to the company’s detriment. But even when goldbricking isn’t the issue, other advantages may accrue. According to NPR’s Jacob Goldstein, UPS estimates that a savings of one minute per day per driver increases profits by $14.5 million each year, and as a result UPS has a serious motivation to optimize its routes. And to do so, they are capturing all relevant data, and dynamically recalculating routes continuously. Monitoring white collar workers may lead to other, analogous savings, as I will explore in later posts.
Originally published on Work Futures, on May 21 2015.
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from Stowe Boyd http://stoweboyd.com/post/120618690782
