Agent-Based Simulation for Investigating Signaling Effects in Markets with Asymmetric Information

In this paper, we show detailed simulation results to show signaling effects in a market with asymmetric information between sellers and buyers. In such a market, only sellers know more about their products than buyers. Therefore buyers do not want to pay for the product more than the price for the average quality they expect in the market. Those buyers action make sellers hesitate to submit products with better quality in the market. Then Shortage of better products reduces the average quality in the market. In turn, buyers expect to pay for the product at lower price. Such iterations make the market with lower quality products. In order to cope with such a problem, sellers are encouraged to show appropriate signals about the products. In our simulation, we show how signals have effects on the quality of products in a market by an agent-based approach. A preceding study shows a signal whose cost depends on the quality of products is effective. However, through our analysis and computer simulations, we find that the balance between the cost of quality-related signals and the product of the amount of products and their producing cost should be carefully considered in the market. Our simulation shows that the market with high quality products can be attained when the cost of quality-related signals is specified appropriately.