Knowledge is power: Information influences how well markets work

Knowing more about the economy and politics is an advantage not only for individuals but also for society as a whole, according to new research by Vienna University of Economics and Business (WU).

The study, conducted by Professor Christoph Weiss from WU’s Department of Economics investigated how more information makes markets work better and found that if we have better knowledge and more information, we are able to make better decisions, which benefits everyone in the end.

“We’ve all been there: you’re a tourist on vacation in a foreign country. You’re unfamiliar with the pricing policies of the restaurants and bars at your destination, so you’re likely to end up paying way too much for your pizza. The well-informed locals, in contrast, choose restaurants where they know they’ll get better value for their money. Having more information is clearly an advantage for the local population in this scenario,” says Professor Weiss.

In competitive markets, the way price levels are set is sometimes very similar to the mechanism in the example about overly expensive restaurants in foreign cities: if there is a lack of information or transparency in the markets, companies can get away with charging higher prices.

If consumers have better information and the number of well-informed customers increases, however, there will be fewer restaurants that offer poor value for money – this means that average market prices will go down.

“In the scenario we discussed above, the markets don’t work particularly well. Government interventions aiming to provide better information or increase transparency – for example in the form of consumer, competition, and regulation policies – can help to improve the situation,” says Professor Weiss.

The study was published in the journal International Economic Review.