Asymmetric Information and Marginal Cost Pricing

Let us view the principal as acting for a set of consumers and the agent as a firm producing a consumption good. The first-best rules defined by (2.4) and (2.5) can be interpreted as price equal to marginal cost since consumers on the market will equate their marginal utility of consumption to price.

Under asymmetric information, price equates marginal cost only when the producing firm is efficient (θ = θ). Using (2.29), we immediately get the expression of  the  price  p(θ¯) for  the  inefficient  type’s  output

Price is higher than marginal cost in order to decrease the quantity q¯ produced by the inefficient firm and reduce the efficient firm’s information rent. Alternatively, we can say that price is equal to a generalized (or virtual16) marginal cost that includes,  in  addition  to  the  traditional  marginal  cost  of  the  inefficient  type  θ¯,  an information cost that is worth . What is required is to generalize the concept of cost to include the information cost imposed by asymmetric information.

Source: Laffont Jean-Jacques, Martimort David (2002), The Theory of Incentives: The Principal-Agent Model, Princeton University Press.

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