Perfect Competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. According to the theory, perfect competition will lead to a completely efficient outcome, where no person could be made better off without another being made worse off. Unfortunately in reality we do not live in a world of perfect competition as there are a number of assumptions which are required for it to exist, such as no barriers to entry, atomicity and perfect information. In this article we will look at the problem of imperfect information which results in an inefficient market at best and in the worst case scenario may lead to the total break down of a market. This is of particular interest to us as imperfect information is a problem that is present in the building trade and thus affects the success of The Building Experience. Finally we will look at ways that we may be able to overcome the problem of imperfect information.

George Akerlof, the famous American economist came up with the peaches and lemons theory in 1970 to illustrate how imperfect information in the used car market leads to inefficiency and possible market breakdown. The theory can just as easily be applied to the building industry. Let's assume for simplicity that the market for builders consists of two types of company, reputable building firms that provide a high quality service and Cowboy builders who have no idea what they are doing. Using Akerlofs theory we will call reputable building companies peaches and the cowboy builders lemons. If a customer gets an extension built by a peach it will bring them a benefit worth £5,000 but it will only cost the reputable builder £4,000 to build. If they get an extension built by a lemon it will be worthless. However due to imperfect information the customer has no way of telling whether the builder is a peach or a lemon before they pay for the extension. Assuming the customer is risk neutral they will be willing to pay up to £2,500 for their extension. Because they have a 50% chance of getting a peach worth £5000 and a 50% chance of getting a lemon worth £0. However in this case the reputable builder will not agree to build an extension for £2,500 as it will cost them £4,000 so they would make a loss. The cowboy will happily take the money but will build an extension that is worthless. After a short time customers will not get extensions built as they will realise the only extensions available at £2,500 will be those built by lemons. Thus there will be no transactions at all. Even though if a reputable builder and a customer were to trade at £4,500 they would both be better off.

This may seem like a simplistic model, which it is, but it certainly highlights the problem of imperfect information. Moreover there is no question that imperfect information is a problem that exists in the building industry. When a customer wants an extension, a loft conversion or a conservatory built, there is a good chance they may not know any builders. In this situation they have no idea what service they are going to get from one builder to the next and unfortunately there are individuals or firms in the trade who aren't very good at what they do. However, in the real world people do get building work done and in most cases are very happy with the outcome so clearly the market manages to overcome this problem of imperfect information. There are two ways in which this can occur. The first is when the buyer takes it upon themselves to improve their knowledge. In the building industry they may do this by asking other friends who have had work done to recommend a builder or alternatively researching builders, such as looking at websites that ask the public to review companies. This is very common in the building industry and many successful companies trade entirely on their reputation and don't even need to advertise, but obviously it takes time to build a reputation like this.

The second way that the market can overcome the problem of imperfect information is by the reputable builders sending a signal to distinguish themselves from the cowboy builders. This is very important for relatively new companies, like The Building Experience, who may have exceptionally high standards of work but haven't been around long enough to establish such a reputation. So how do we do this? One way is to spend a lot of money on an advertising campaign, such as by paying for a centre page spread in a national newspaper or better still hiring Nick Knowles to do a television advert. This advertising strategy works on two levels. Primarily, if people see a professional advert saying how good a company is they are likely to believe it, especially if they are being told by someone with as big a reputation as mighty Nick. Secondly, and arguably even more importantly, by spending a large sum on an advertising campaign it indicates to customers that the firm will be around for years to come and are serious about what they are doing. Otherwise why would they bother spending the money.

So what are we doing at The Building Experience to overcome the problem of Imperfect information? Unfortunately we don't have a big enough advertising budget to hire a celebrity to do an advert for national TV. However we've already spent quite a bit of time and money on interesting advertising techniques which are obviously relatively successful, or you wouldn't be reading this blog. We are also lucky enough to be run by two gentlemen who have been working in the building industry for many years and carry with them tremendous reputations, albeit reputations that were built at other companies.  Finally and perhaps most importantly, even if our advertising campaigns and our reputation isn't enough to convince you we are a peach and not a lemon, with The Building Experience you'll always be there working along side us so you will be able to keep an eye on proceedings!