Asymmetrical information

Also known as: Typically, a situation of asymmetrical information occurs when the seller knowns more about the product than the buyer. Hence, the information is said to be distributed asymmetrically. (However, it is possible for the reverse to be true -- for the buyer to know more than the seller)

The buyer, faced with several vendors who he cannot trust to tell him the truth, cannot fairly evaluate the goods to be purchased.

This situation was first described in by George Akerlof (who coined the term asymmetric information) in his 1970 work The Market for Lemons. He also noticed that the average value of the commodity tends to go down, even for those of perfectly good quality. It is even possible for the market to decay to the point of nonexistance.

Take, for example, online games such as Diablo II. People will sometimes sell items on Ebay. It is possible for the seller to "spoof" these items and defraud the buyer. As a result, people will be less willing to risk getting ripped off, and will therefore not spend as much for a given item.