Asymmetric Markets
Asymmetric markets are markets in which one side knows more than the other. Tibor Scitovsky’s “The Benefits of Asymmetric Markets” (Journal of Economic Perspectives 4(1), Winter 1990) argues that this condition — the nuisance that perfect-competition theory assumes away — is a main source of monopoly power and of a list of real-market benefits that the perfect-competition model cannot produce. The paper restates themes from his Welfare and Competition (1951, rev. 1971) and “Pricetakers’ Plenty” (1985).1
Knowledge is power
Scitovsky drops the general-equilibrium assumption that “all economic agents possess all the market information relevant to the transactions they enter or contemplate entering into” — the one assumption, he says, that “does perhaps the most violence to reality.” Knowledge is then power: the better-informed side of a transaction can exploit the other side; that power is “the main source of monopoly power”; its exploitation yields monopoly profit; and rivalry among those who hold it “is the main form of monopolistic competition.” His programmatic claim is that competition’s main benefits come from harnessing this knowledge-born power rather than from eliminating it — only eliminating knowledge differences could eliminate the power itself.2
The root cause is the division of labor: everyone knows more about their own specialty and less about everyone else’s than the specialists in it do, so in markets for final goods the typical seller is a specialist facing a generalist. The gulf widens as specialization deepens, and it cannot be trained away, because market exchange is one of the few activities specialists and nonspecialists alike must perform. Scitovsky notes the commodity-exchange ideal — goods traded sight unseen on identity, grade, and price alone — is reachable only when most buyers are themselves expert specialists; perfect markets are made, not given.3 The mechanism is division-of-labor’s third face (after productivity and Smith’s warning), and the paper’s quarrel with the “given data” setup runs parallel to knowledge-problem. Scitovsky’s later account of the consumer capacities those markets leave underdeveloped is creative-consumption.
Buyers’ markets
In consumer goods markets the knowledge gap gives sellers a durable advantage; supplier competition shrinks it without removing it. The institutional form is the price-maker / price-taker relationship: where bargaining would cost more than it earns, the specialist side sets take-it-or-leave-it prices and also chooses what products, qualities, and services to offer. Buyer defenses are reputations, rankings, and licensing demands — which make demand less elastic and competition more monopolistic in character. A markup over marginal cost then gives the seller a reason to compete on anything but price.4
Nonprice competition is the provision of amenities: product information (advertising, displays), location and pleasant surroundings, polite service, credit and delivery, guarantees and easy refunds, and deep inventories allowing instant delivery. Scitovsky’s central welfare claim is that these amenities are joint products buyers willingly pay for — discount houses that strip the services away have kept only a small share of the market — and that most of them cost sellers less than buyers would pay to replace them. Advertising is the clearest case of scale: a few sellers can spread information more cheaply than each buyer could acquire it alone, and seller bias is offset by rival advertising plus disclosure legislation. On his accounting, nonprice competition both compensates buyers for the markup and improves the Pareto efficiency of the market.5
Producers’ nonprice competition adds inventories and standby capacity, product variety, warranties and repair service, and the research and investment behind new products and cheaper processes. Advertising here builds the mass market that makes mass production pay. The distributional side effect Scitovsky wants noted: market-oriented innovation mostly cheapens goods that were once luxuries, so a market economy tolerant of income inequality still widens access to goods and services.6
Sellers’ markets
The asymmetry can point the other way. When buyers know more and are few enough to coordinate, they become price-makers: employers setting wages before unions, wholesale houses and Japan’s trading companies (sosha) dealing with small suppliers. Their nonprice competition is the mirror image — good working conditions and fringe benefits for workers, credit, transport, quality control, and design help for suppliers — and Scitovsky reads a sellers’-market flavor into the arrangement, since the amenities run in the sellers’ favor. The British industrial-revolution case shows the limits: with the enclosure movement swelling the labor reserve, employers never softened the relationship, and workers answered with collective action and bilateral monopoly. Japan’s largest-firm labor markets, by contrast, show nonprice competition as strong as consumer markets, plus a morale and effort effect that consumer markets do not have.7 The monopsony frame is also the wiki’s reading of ufc-mma-business-model.
The price / nonprice tradeoff
Price competition narrows markups and pushes toward market clearing; nonprice competition creates the amenities and innovations but tends to widen markups and differentiate products. Scitovsky treats the two benefit sets as mutually incompatible and says outright that he knows “no way to compare or rank them,” while judging nonprice competition the priority if forced to choose. Oligopoly tilts the choice further toward nonprice weapons, since price cuts invite visible retaliation while service competition is slower to match. His policy conclusion is a mix — patent and copyright law to fund innovation’s gamble, antitrust to push monopoly power toward nonprice competition and away from collusion, buyouts, or regulatory capture, truth-in-lending and disclosure rules to police the informational amenities, and employment policy for utilization. With more than one benefit on the table, he argues, the simple case for noninterference “loses much of its force.”8
A smaller point in the paper: asymmetric markets also carry better investment signals. A perfect competitor sees only current prices; a price-maker also sees quantity signals (orders, inventories, sales share) that say not just that investment would pay but roughly how much, plus a feel for demand elasticity against competitors. Scitovsky credits Richardson’s Information and Investment (1960) for the point.9
Symmetric markets
Where both sides lack marketing expertise, middlemen insert themselves — merchant houses, auction houses, real-estate brokers, used-car dealers — often becoming price-maker on both sides and collecting both monopoly and monopsony margins. Where both sides are expert professionals, the result is bilateral monopoly (armaments: buyers fund product development cost-plus; unionized labor: benefits arrive through bargaining) or the commodity exchange, whose tiny commissions run the venue and whose grading makes advertising and inventory service redundant. General equilibrium theory, Scitovsky concludes, modeled the one corner of the economy where nonprice competition barely exists, and generalized from it.10
Competing readings of the same devices
Akerlof’s “The Market for ‘Lemons’” (Quarterly Journal of Economics 84(3), 1970) reads buyer-seller information asymmetry as a market failure: when buyers judge quality by group statistics, sellers of poor quality cash in, average quality falls with price, and the market can vanish — good used cars driven out, health insurance unobtainable at the ages that need it most, honest dealing driven out by dishonest. Akerlof’s counteracting institutions are exactly Scitovsky’s amenities — brand names, guarantees, dealerships, licensing, and reputation — but the valuation reverses: for Akerlof they are repairs to a broken signal, and the non-atomistic institutions that provide them concentrate power “with ill consequences of their own.”11 The same warranty is a welfare benefit in one paper and a symptom in the other; which reading dominates is a question of which margin the asymmetry is eating — quality selection (lemons) or service and innovation (Scitovsky).
Against Hayek’s knowledge problem the axis differs again. Hayek’s knowledge is dispersed among individuals, and the price system’s virtue is aggregating it without anyone collecting it; Scitovsky’s knowledge is unequal across the two sides of a market, and its virtue (or vice) is the monopoly power it confers. knowledge-problem is about distribution across persons; asymmetric markets is about distribution across roles. Hayek shows prices as a communication channel for circumstances of time and place; Scitovsky’s price-makers, having better and earlier information, charge a markup for services that partly replace that channel for inexpert buyers.12
Nelson’s “Information and Consumer Behavior” (Journal of Political Economy 78(2), 1970) grounds the buyer side of the story in how consumers actually economize on quality information: by search (inspection before purchase) or by experience (purchase to find out). Quality information costs more than price information; the number of brands a consumer samples tracks purchase frequency; correlated sampling across consumers caps the number of brands a market supports; and Nelson’s tests find more monopoly for experience goods and durable goods, plus advertising and store-location patterns that follow the same split. Nelson’s frame qualifies Scitovsky’s generalist buyer: ignorance about quality is real, but it is managed through brands, repetition, and advice rather than being raw helplessness.13
Reader’s marginalia (Nathan, 2026-10-30)
The Readwise copy behind this page is heavily annotated; the notes argue with the paper and are worth preserving as the reader’s working position:
- On the division-of-labor root cause: firms often have strong incentives to employ specialist buyers (procurement), which cuts against the generalist-buyer picture. “A true statement that itself is perhaps being over-played.”
- On buyers unable to distinguish quality: most distinctions between two products are not consequential for most buyers — price, durability level, and taste are the operative dimensions, a much more tractable decision problem than the paper’s framing suggests.
- On take-it-or-leave-it pricing as progress over bargaining: “this argument depends on… the viability of haggling?”
- On sellers choosing products unilaterally: doubt that an information-symmetric market would be built-to-order.
- On the discount-house comparison: location matters and the buyer’s time has value too — the amenities are not free-standing.
- On mass-production innovation flattening access: “This is something I find that people often forget” — agreement.
- On monopoly profit as innovation’s fuel: some economically valuable tasks need large capital concentrations (utilities, space travel), where a big player is necessary rather than merely tolerated; direct government operation is often less efficient than a possibly-regulated oligopoly or a service-management market, though procurement and contract requirements let the cross-pressures back in.
- On the paper’s use of “monopolistic competition”: most of the passages seem to describe oligopoly or local monopoly instead.
- On the risk of catering to demand “not yet formulated”: the seen fix is a more expansive view of the producer’s costs, which he does not consider a bad one.
Open questions
- Whether Scitovsky’s benefit list and Akerlof’s failure list can be ranked at all. Scitovsky admits he knows no way; the marginalia suggest the buyer-side cost of quality comparison is smaller than the paper needs.
- Whether cheap, ubiquitous quality information (reviews, price search) erodes the seller’s knowledge advantage or just relocates it into the platforms that mediate the information — the question applies the asymmetric-markets frame to attention-economy intermediaries.
- How the frame reads in markets where quality is unobservable even after purchase: in security software the lemons reading dominates the wiki’s account (see economics-of-cyber-risk and Anderson’s “Why Information Security is Hard”)14, which suggests Scitovsky’s amenities require at least post-purchase learnability to be produced at all.
Sources
- Tibor Scitovsky 1990 — The Benefits of Asymmetric Markets
- George A. Akerlof 1970 — The Market for “Lemons”: Quality Uncertainty and the Market Mechanism
- Phillip Nelson 1970 — Information and Consumer Behavior
- F. A. Hayek 1945 — The Use of Knowledge in Society
- Ross Anderson 2001 — Why Information Security is Hard — An Economic Perspective