Reputations in Markets With Asymmetric Information: A Classroom Game

Abstract

The authors describe a classroom game used to teach students about the impact of reputations in markets with asymmetric information. The game is an extension of Holt and Sherman's lemons market game and simulates a market under three information conditions. In the full information setting, all participants know both the quality and the price of the items for sale. In the second setting, sellers have better quality information than buyers. In the third setting, sellers maintain their information advantage, but buyers may post feedback on the sellers' performance. The posted feedback generally increases buyer trust and disciplines sellers, resulting in higher levels of trade and higher average product quality. The game can be completed in one class period and includes discussion questions.

Keywords:

• asymmetric information
• classroom game
• reputation
• trust