Economic Explanation of Bad-and-good-product Coexisting Phenomenon in Online Shopping Market from a Perspective of Bidimensional Asymmetric Information

Abstract

There is a typical bad-and-good-product coexisting phenomenon in online shopping market: products with high prices do not always have high quality and products with low prices do not always have low quality too, showing obvious asymmetric information. Based on the stylized fact of bidimensional asymmetric information in online shopping market, namely firms have private information in the two aspects of product quality and production costs, this paper explains the economic mechanism of the abovementioned phenomenon from a perspective of market equilibrium for the first time by establishing an analytical framework of bidimensional asymmetric information. It shows that owing to bidimensional asymmetric information, the interaction of consumers and firms makes prices and quality of products no longer have a monotonically increasing relationship, thereby possibly leading to market equilibrium of bad-and-good-product coexisting in online shopping market; and it confirms the existence of this equilibrium under reasonable conditions. By a static comparison, this paper explores the effects of changes in market environment on price signaling efficiency of product quality and consumer purchase behavior as well as the effectiveness of means such as information disclosure by online shopping firms, consumers' feedback scoring mechanism for businesses and guaranteed return of products on the elimination of bad-and-good-product coexisting phenomenon, thereby providing reference for further normative development of network industries in China.