24 June 2011

Market Myths: Perfect Information

The superiority of the market as a system of allocation for goods and services relies on a number of assumptions. It was the central theme of my 2006 book Market Schmarket that these assumptions no longer held in the highly developed globalised economy of the 21st century. This post is offers more evidence that this is so.

One area where this assumption is clearly being broken is in the purchase of train tickets. The hugely complex details about when many types of ticket are valid defeats understanding. Not only is it complex, but it also changes frequently and is not easily available. When you buy a ticket at the station machine you are simply required to consult the website for information about the validity of the ticket you are buying. How can this possibly fulfil the market requirement for perfect information?

The answer, of course, is that it is not intended to. You are expected to buy a ticket with greater validity than you need, at higher cost, rather than risk being caught without a ticket and obliged to pay a penalty fare. This also contravenes another assumption of the market system in being entirely abitrary. Whether or not you pay the penalty fare relies on the mood of the inspector you encounter. If he is hungover you are likely to suffer. If he takes pity on you for a foolish young woman you may be spared.

Most people who travel regularly by train are aware that splitting your journey works out cheaper than buying a through ticket. This is easily done by visiting website such as Split Your Ticket. However, a new rule has gone out to ticket salespeople: they are no longer allowed to give you the information you need to compare prices at the station. This makes a lie of the poster of an attractive young woman at our station who promises you the cheapest ticket, and advice on how to find it.

This left me playing a bizarre guessing game at the ticket office in Cheltenham the other day. I enquired about the relative prices of a ticket to Manchester, and two tickets, one to Birmingham and the other for the second leg. The downtrodden salesman was trying to stick to his rules: he was not allowed to tell me which way was cheaper; he was allowed to tell me prices if I asked for specific routes.

This refusal to inform the customer about the best value way of buying a ticket to their destination clearly contravenes the market assumption of perfect information. But it also illustrates how the market system really works: by setting us against one another and undermining the basic human motivations towards honesty and mutual aid that enable us to live a good and happy life.

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