Information asymmetry, attitudes toward risk, and macroeconomic performance

Every firm in differentiated oligopoly offers a product that is different from that of rival firms. Similarly, in general, a firm interfaces with consumers and interacts with rival firms on the market. As a result, both the firm and consumers experience information asymmetry. In practice, a firm is a risk taker in its dealings with rival firms and is a risk averter in its interface with consumers. However, firms utilize intangible investments (non-price strategies) to convey the value of their product to consumers and stabilize their market share. Note that consumers are risk averse and ignore such attempts by a firm once they recognize the intrinsic value of the product. These two features explain the frequency and depth of the supply fluctuations that have not been acknowledged so far. This study offers a fundamental explanation of this phenomenon along with the steady state behavior in a synthetic manner.

“With uncertainty entirely absent, every individual being in possession of perfect knowledge of the situation, there would be no occasion for anything of the nature of responsible management or control of production activity.”- Knight (1957, p.267)