271

BusinessCommunicationunderAsymmetricInformation

EriShiozawa

1

2

Introduction

InformationAsylnmetryandBusinessCommunication

TheLemonsMarket

SignalFunction

BusinessCommunicationandInformationAsymmetry

intheLaborMarket

BadLoansandtheDisclosureofInformation

AdverseSelectionandBusinessCommunication

MoralHazardandBusinessCommunication

AdvertisementasaMeansofBusinessCommunication

AmericanvsJapaneseAdvertisement

AdvertisementDirectlyReflectingCulture

BusinessCommunicationandLegalRegulationS

SummaryandConcludingRemarks

lntroduction

Underordinarycircumstancesinformationgapsarerifeinbusinesscotnmunication

andcausenumerousproblemsthatweareunawareofWetendtoactunderthe

naiveillusionthatifwearediligentinoureffortstocommunicatetheotherperson

willunderstandwhatwemeanIfhoweverthatpersonpositionistheoppositeof

oursorifthereareseriousdiscrepanciesintheinformationthatwebothhavein

somecasestheinformationbeingtransmittedisnotreceivedinastraightforward

wayInothercaseseventhoughtheremaybeabsolutelynointentiontodeceivea

businesstransactionmightproceedmoresmoothlyifonesidedidnotrevealallits

weaknessestotheotherUndertheecircumstancesweSaythereisan

27281122721

?@asymmetryThesetypesofproblemsareoftencalledagencyor2

principalagentproblemsTheprincipalisthepartylackingtheinformationand

theagentistheonewiththeinformationThisinteractionofprincipalandagentis

originallypartofgametheoryineconomicsandmaybecomequiteteOhnicalwith

mathematicalanalysesInthispaperwewillattempttoanalyzeasymmetric

informaonfromamoresociologicalpointofviewfocusingonthebusiness

communiCationaspect

Themosteasilyunderstandableexampleofasymmetricinformationwouldbethe

saleofausedcarAnotherexampleishealthinsuranceinwhichtheinsurance

companymaynotknowtheexactconditionofpeopleshealthstatusalthoughhealth

examinationfilesmustbesubmittedbytheprospectivepolicyholderInthesecond3

handcarmarketagamerelationshipdevelopsbetweenthesellerwhowantstosell

acarthathassomethingwrongwithitforthebestpossiblepriceandthebuyer

whowantstopurchaseagoodusedcarascheaplyaspossibleInthefirstsection

weanalyzewhatisthebestwaytothinkaboutbusinesscommunicationbetweenthe

twosidesinthissituationHowcanweconvinceapartytoactinacertainway

Thatishowcanwelureacustomertopurchaseaproductleadingtoprofit

maximizationforus

ThisthenleadsustothinkaboutadvertisementsIndeedin1997theUS

advertisingindustryitselfisestimatedasa186billiondollarindustrysubjecttothe

samemarketmechanismasanyothergoodsmarketSponsorsarealwayslooking

fornewsalestacticstoattractpotentialcustomersAdvertisementscanbe

regardedasaneffectivemeansofbusinesscommunicationbetweencorporationsand

consumersInthesecondsectionwecompareadvertisementsinJapanandthe

UnitedStatesasawayoffocusinginoninterculturalissues

1Thewordasymmetrymeans1ackofsymmetrthereforeinformationasym

metryoccurswhenthereisalackofcorrespondenceorinequaiityihtermsofthepro

portionofinformationinvolvedfortheparties

2SeeAppendixforfutherexplanation

3HeregameisusedasgametheoryappliedinaneconomiccontextThistheory

developedmainlybyamathematicianJohnvonNeumann19031957analyzes

howtwoormorepartiesorplayerschoosestrategiesthatcorrespondinglyandjointly

affecteachparticipant

273 273

1InformationAsymmetryandBusinessCommunication

4

TheLemonsMarket

InAmericanslangadefectiveitemiscalledalemonNaturallyenoughinthe

usedcarmarketmanyarelemonsItcouldthereforebesaidthataninformation

gapieinformationasymmetryexistsintheusedcarmarketbetweenthe

sellerwhohasinformationthatacarisalemonandthebuyerwhodoesnotAs

farasthebusinesstransactioninvolvingaIemoncarisconcernedthebestpolicy

forthesellerisnottocomestraightoutandcommunicatethatfactconverselyit

isadisadvantageforthebuyernottoknowthisinformationInshortthereisa

conflictofinterestregardinginformationbetweenthetwopartiesinvolvedinthe

saleGamenowcommencesonwhatisknownasazerosumgaeinwhichwhat

isadvantageousforonesideisdisadvantageousfortheotherThepurposeofthis

paperistoconsiderwhatsortsofstrategytousewhenconductingbusiness

communicationunderthesecircumstances

Asourfirstcase1etussupposethatthesellerhonestlypassesontheinformation

shehasiethatthecarisnogoodtotheotherpartyThismaynotbea

profitablestrategyintermsofbusinesscommunicationbutitdoeseliminatethe

objectiveqinformationasymmetryThatisallfactualinformationthattheseller

hasavailableisdisclosedtothebuyerItisunclearhoweverwhetherornot

doingsowillhelpexpeditethecarsaleIncaseslikethisthedisclosureof

informationproducesasubjectiveinformationasymmetryinthebuyerThis

meansthatthebuyerbecomesuneasyandstartstowonderwhatotherproblemsthe

carmaydeveloplatergiventhedefectsthatthesellerhasadmitteditalreadyhas

Inshortthebuyerbeginstothinktheremaybeanevenbiggerinformationgap

betweenhimherselfandthecarsellerthanwaspreviouslysuspectedThisgap

whichiscausedbythedisclosureofinformationiscalledasubjectiveinformation

asymmetry

Underthesecircumstancesthedecisionastoabouthowmuchinformationthe

sellershouldcommunicatetothebuyerrequiresadelicatestandardofjudgment

Thesolutionthatemergesiswhatisknownasanoptimalinformationstrategy

Thesellerprovidestheminimumamountofinformationnecessaryandtriesto

concealthosepointsthatitwouldbedisadvantageoustorevealThebuyeronthe

4AmoretechnicalapproachcanbefoundinHVarianicroeconomicAnalysis2nd

edNYWWNortonCompanyInc19781984290305

2748112274

otherhandemployseverymeanspossibletoextractthisinformationfromthe

sellerWhatmakesthisstrategyoptimalLogicallyspeakingasituationthatis

regardedasoptimalissynonymouswithttmaximizationofprofitsincefor

statisticalpurposesitcanbedealtwithinthesamewayButinfactwhatis

knownassalesmanshipornegotiatiionalsohasalargeroletoplayInother

wordsthesellermakesanintuitivejudgmentaboutwhatisoptimalduringthegive

andtakewiththepotentialbuyeratthetimethesaleisbeingmadeThissortof

instinctisapartofasymmetricinformationThereforeevenunderthesame

marketconditionswhenintuitivejudgmentisbeingusedbythesellerpricemay

varyamongcustomersThesalespersonmaygetsomesignalthatthepotential

customeriswillingtopayahighpriceorisverydesperatetobuyInthiscase

thesalespersonwilllikelysettheinitialpricefairlyhighorwillnoteasilyyieldto5

pricereductionsThisistheartofnegotiationorpersuasionanddiffersfrom

culturetoculture

OthermethodscanbeusedtofillintheinformationasymmetrygapThefirstis

priceLetustakeaspecificexampleSupposeyouaresellingalemoncarinwhich

theairconditioningisdefectiveIfthesaletakesplaceinthewintertimethe

buyermaynotnoticethereisanythingwrongOnepossiblesalesmethodinthat

situationmightbetoreducethesalespriceandnottellthebuyerthattheair

conditionerdoesntworkThenifthebuyerlatercomplainsyoucouldsaythat

youreducedthesalespricebytheamountneededtohavetheairconditioning

repairedThuspricecapbeusedtocorrecttheinformationgapInsurancecan

alsobeusedtoservethesamefunctionAtthetimethecarissoldtheusedcar

dealeroftenagreestoprovideawarranteeforlaborandpartsForexamplethe

dealermayundertaketoreplaceanydefectivepartsorpaylaborcostsforany

problemsoccurringwithinthreemonthsofthesaleifproblemsoccurinthethree

monthsthereafterpartsareprovidedfreebutthebuyerpaysforthelaborneeded

toreplacethemThewarranteeofcoursewilldifferdependingontheageand

priceofthecar

Insomesensethistypeofagreementcanbedescribedasancimplicitbusiness

communicationbecauseinsteadofsayingwhatpartsofthecardontworkthe

dealerdrawsupacontracttorepairthematthecompanysexpenseduringthe

warranteeperiodThisinitselfisasplendidformofbusinesscommunication

5GavinKennedyFieldGuidetoXegotiationHarvardHarvardBusinessSchooI

Press1994

275275

SignalFunction

Thewarranteeandpricereductionsjustmentionedcanbethoughtofasakindof

signalinthebusinesssectorReducingthesalespriceisahintthatthecarmaybe

alemonwhereasalongwarranteeperiodsuggeststhatlittleisIikelytogowrong

withitGenerallyspeakingpriceisasignalthatindicatesinformationaboutsupply

capacityandthedegreeofchoicebetweenbuyerandsellerandthatsumsupallthe

otherinformationabouttheitembeingsoldOnthebasisofpricethebuyer

considerswhetherthecarisexpensivebecauseitisprobablygoodorcheapbecause

itprobablyisntandthendecideswhethertobuyitornot6

TheAmericaneconomistThorsteinVeblenwhoisregardedasagiantofthe

institutionalistschoolnotedthatthesignaltexpensivebecauseitisprobablygoodis

usedtojustifythespendinghabitsoftheleisureclassInthissituationthebusiness

communicationisthehighpricealoneandittellsthewholestoryTheveryfact

thatthepriceforsomethingisexceptionallyhighrendersunnecessaryany

explanationabouthowgoodthequalityisorhowrareitsvalueInVeblensworld

unlikethecaseofanordinarydemandcurveariseinpricesstimulatesgreater

demandandincreasesthedesiretobuymoreTheimplicitbusinesscommunication

thatsomethingisttexpensivebecauseitisprobablygoodactsasasignalindicating

thequalityofthepricefunction

Anotherexamplemaybeobservedinthemarketforantiquessometimesahigh

priceofferedbytheprofessionalantiquedealermaysignaltotheamateurcollector

owneroftheitemthattheantiquemayactua11ybeworthevenmoreThusthe

dealermustbetactfulinsettingtheinitialpriceinthenegotiationthatistoo

highaninitialofferingpricemaybidupthefinalpricewhiletoolowapricemay

turnawaythepersonThedealermustbeabletoseewhatkindofpersonthe

owneroftheantiqueactuallyisandsendoutthemostappropriatesignalwhich

willmaximizeprofit

BusinessCommunicationandlnformationAsymmetryintheLaborMarket

ThesystemoftenusedbyJapanesecompaniesofpayingthesamesalarytorecent

collegegraduatesmayalsobethoughtofasasignalbetweenacompanyandits

newemployeesLetusimaginethatacompanydecidestohireatotalof15neW

6ThorsteinVeblenTheTheoitheLeisureClass1nEconoicStudyInstitu

tionsNJTransactionPublishers1991TheoriginalbookbyVeblenwaspublished

in1899

2768112276

employeesfivefromUniversityAfourfromUniversityBthreefromUniversity

CtwofromUniversityDandonefromUniversityEThestudentswhoapplyto

workforthatcompanycanacquirefairlyaccurateinformationonthecompanys

positioninthebusinessworlditsprofitabilityassetsetcInasmuchasobjective

informationonthecompanyisavailableeverywhereitislikelythataspartofits

businesscommunicationsthecompanywillbediligentinpublicrelationsefforts

aimedatyoungPeoPle

Ontheotherhandtheinformationthecompanyisabletoacquireaboutthe15

studentsitisabouttoemployisextremelylimitedProbablythemostthatis

availableiswhatisfoundinthedocumentstheysubmitabouttheirfamily

backgroundgradesduringtheircollegeyearsIettersofrecommendationetc

althoughthecompanymayguessitisimpossibletoaccuratelypredictfromthis

informationhowwelltheywilldoaftertheyenterthecompanyInshortthe

situationisoneoftotalinformationasymmetrybetweenthecompanyandthe

studentsithiressincetheformerdoesnothavemuchinformationaboutthelatter

Underthesecircumstancesthewayacompanysetssalariesfornewlyhired

employeesiscloselyrelatedtotheproblemofinformationasymmetryinthelabor

marketTomakealongstoryshortthecompanytakestheaveragebetweenwhat

itwouldpaytothemostableandtheleastableofthe15studentsandmakesthis

thestartingsalaryforall15InJapanthismethodisregardedasthemostfairIn

factthiswayofdoingthingsisnotconfinedtoJapanbutisageneralpracticein

theworldslabormarketsIntheUnitedStatesforexampleauniformwagescale

issetforcasesinvolvingtheemploymentofIargenumbersofimmigrantsSomeof

theimmigrantsmaybescientistsordoctorsorhaveotherspecialqualificationsBut

whenlanguageproblemsandlocallawsaretakenintoconsiderationitisnot

possibletochooseonlytalentedprofessionalsWh6nnoinformationabouttheother

personsabilityisavailablethecommonpracticeistosettlethematterforthe

timebeingbypayinganaveragewage

LetusconsideranotherexampleofAmericanbusinesscommunicationLetus

supposeayoungwomanwhohasjustcompletedfouryearsatanAmerican

universityishiredbyacertaincompanyTwoorthreeyearslaterhaving

acquiredspecificinformationaboutthenatureoftheworkandherownsuitability

foritshequitsherjobandentersgraduateschooltobecomeaCPACertified

PublicAccountantoralawyerortopursuean ?@professionaldegreesuch

asanMBAThisisacoursethattalentedyoungAmericansoftenactually

277277

pursueTwoorthreeyearslaterhavingreceivedaprofessionaleducationand

acquiredanadvanceddegreetheyoungwomanwillonceagainlookforan

opportunitytouseherskillsintherealworldInthiscasethereshouldbenoneed

forhertoputupwithaveragetreatmentbecauseofalackofinformationaswas

previouslythecaseFirstofallanMBAdegreeitselfisasignalindicatinga

certainsalarylevelintodaysAmericanfinancialworldInadditionsheisselling

herselftothecompanyassomeonewithspecialskillsthatotherMBAdegree

holdersdonthaveHoweffectivelysheisabletodothisdependsonherskillat

businesscommunicationBusinesscommunicationinthisinstanceworkstoeliminate

theinformationasymmetrybetweenthecompanyandtheemployeeItsfunction

hereispreciselywhatinformationoughttobeinacompetitivesocietyAsaresult

adecisionismadeinthelabormarkettorewardthosewhoarecapablewithhigh

salariesandtreatcoollythosewhoarethoughtnottobeThisperfectingof

informationleadstowhatisknownasperfectcoMpetitionttordependingonhow

youlookatitadogeatdogenvironmentwithanunfeelingsidetoitthatcritics

sayisunsuitedtoJapaneseculture

BadLoansandtheDisclosureoflnformation

Whattodoaboutthebadloansituationisnowbecomingaseriousproblemwith

implicationsforthefuturefortunesoftheJapaneseeconomyTheJapanesefinancial

sectorwhichatonetimeseemedsettoconquertheworldisbeingshakentoits

veryfoundationsTheconsensusisthatthoseinstitutionswithbadloansontheir

booksshouldmakethatinformationknownInshortthereispressurefor

disclosureHowshouldweregardthedisclosureissuefromtheperspectiveof

businesscommunicationBasicallyitresemblesthelemoncarprobleAfinancial

institutionwithbadloansislikeacarsellerwithalemonOntheotherhandits

depositorsgovernmentauthoritiesandthepublicatlargewhoarebeingaskedto

rescuethebankwithpublicfundsarelikesomeonewhoisabouttobuyalemon

withoutknowingwhatiswrongwithitThe1emonbankttwouldlikethesupport

ofpublicfundswithoutdisclosinganyinformationthetaxpayersontheother

handwanttofindoutexactlywhatthebanksproblemsareandfixthemwithas

littlepublicmoneyaspossibleTheyfeelthatsellingadefectiveproductlikea

lemoncariswrongandthatundercertaincircumstancesitisonlynaturalthata

lemonbankshouldgobankrupt

Fromthestandpointofbusinesscommunicationstrategythebestpolicyfora

2788112278

1emonbankisnottodiscloseinformationaboutitsbadloansEvensupposingthe

banktriedtofillinthegapsbyrevealingsomeinformationtothetaxpayersit

wouldonlycreatethesubjectiveinformationasymmetrydiscussedearlierandmake

theinformationgapbetweenthetwosidesevenbiggerInshortitwouldonlygive

risetothesuspicionthatthebankwasconcealingevenmorebadloansthanithad

alreadydisclosedForthisreasonthedisclosureofbadloanscannotbesolvedlike

anordinarybusinesstransactionInsuchasituationmarketfailurewouldoCcur

andlegallybindingmethodswouldhavetobeadopted

AdverseSelectionandBusinessCommunication

Inthecaseofalemoncarmarketwehaveassumedthattosomeextentthebuyer

canguessfromtheinformationgivenorthecarspricewhetherausedcarisany

goodornotInfacthoweverevenintheusedcarmarketitishardtodetermine

preciselyjusthowmanyofthecarsinacarlotarelemonsandhowmanyare

plumsieagoodusedcarLetusnowconsiderthefollowinghypothesis

Supposethereisamarketwith100peoplewhowanttosellthecarstheyareusing

andanother100peoplewhowanttobuyausedcarFiftyofthecarsinthe

marketareknowntobeplumsandtheother50areknowntobelelnonsAlthough

thecurrentownersiethesellersknowwhethertheirowncarisaplumora

lemonthebuyersdonotknowwhetheraparticularcarisanygoodornotThe

ownersofalemonwouldbehappytoget1000dollarsfortheircarwhereasthe

ownersofaplumhopetosellitfor2000dollarsThebuyersontheotherhand

arewillingtopay1200dollarsforalemonand2400dollarsforaplum

Supposethatasaresultofbusinesscommunicationtheownersofthelemon

carsdisclosethatinformationSinceperfectinformationonthequalityofall100

carshasbeenprovidedbythesellersthedealwillgothroughifthetwosidescan

agreeuponthepriceunlessthebuyersformthesubjectiveinformationasymmetry

discussedearlierNoproblemsarelikelytoariseifapriceissetsomewhere

betweenthe1000dollarsthelemonsellerwantsandthe1200dollarsthebuyeris

willingtopayorsomewherebetweenthe2000dollarstheplumsellerwantsand

the2400dollarsthebuyeriswillingtopayforitThetransactionsareexactlythe

sameastheywouldbeforordinarygoods

Butaswasmentionederlierbusinesscommunicationthatinvolvesthedisclosure

ofinformationdoesnotnecessarilyleadtoasolutionoftheproblemsinceitmay

onlygivethebuyernewcauseforconcernandcreatesubjectiveinformation

279279

asymmetryLetusimaginethereforethatthesellerdoesnotdiscloseany

informationSupposethatabuyerlooksataparticularcarandthinksthatsince

theprobabilityofitbeingalemonoraplumis5050afairpriceforitwouldbe

1800dollarstheaveragebetween1200xO52400xO5Butwhowould

bewillingtoselltheircaratthatpriceTheownersofthelemonswouldsell

becausethepriceishigherthanthe1000do11arstheywerehopingtogetbutthe

ownersofplumswouldnotsellbecauseitisbelowthe2000dollarstheyhad

originallyhadinmindInshortsettinganaveragepriceof1800dollarswould

createasituationinwhichonlylemonswouldbeputupforsaleThisiswhatis

knownasmarketfailurettTheproblemisthatexternalitiesexistbetweenthe

sellersofgoodandbadcarsanindividualsdecisiontoselladefectivecarwill

affectthebuyersexpectationsabouttheaveragequalityofthecarsavailableinthe

marketInotherwordsifthepriceisloweredtowhatabuyerthinkswouldbe

fairtopayforanaveragecarthosepeoplewhoaretryingtosellgoodcarslose

outThustheonlycarsthattradeinthemarketaretheveryonesmostpeople

thinkshouldntbethereAsthisresultshowsthephenomenonofadverse

selectiooccursandbadproductsdriveoutgoodonesfromthemarketplaceWe

saythatincentivesaredistortedandmarketdistortionsarelikelytooccurIn

additiontoadverseselectionmoralhazardisanothermajormarketfailureandwill

betakenupinthefollowingsection

Thequestionmaywellarisewhetherbusinesscommunicationunderthese

circumstancesisofanyusewhatsoeverInfactthereisaroleforittoplayHere

iswherethequestionofreputatiocomesinIntheabovehypothesesabsolutely

noconsiderationwhatsoeverwasgiventoreputationoftheusedcardealerorthe

trustthathasaccruedfrompasttransactionsIfadealerisinbusinessforany

lengthoftimenomatterwhereitmaybeshewilldevelopareputationIfthe

dealerissomeonewhomakesanhonesteffortandwantsthebusinesstosucceedshe

wouldprobablyavoidknowinglysellinglemoncarsatinappropriatepricesand

therebydissatisfyingthecustomerAgoodreputationearnedbyconstantconcerted

effortsofthiskindiscalledgoodwillttGoodwillisitselfanintangibleassetthat

speaksvolumesinsituationswherethequalityofthegoodsbeingsoldcannotbe

determinedfromappearancealoneIfaspotisfoundonagarmentboughtata

2808112280

famousdepartmentstorethestorewilleithergivearefundorreplacetheitem

withanewonetoavoidbl6mishingitsreputationDoingeitherofthesethingsisan7

excellentformofbusinesscommunication

MoralHazardandBusinessCommunication

Asmentionedaboveanotherinterestingformofmarketfailureismoralhazard

MoralhazardisoftenseenintheinsurancebusinessLetustakeacaseinvolving

thetheftofabicycleInordertomaketheissuemorereadilyunderstandablelet

ussupposethatallconsumersliveinanareawheretheprobabilityofbiketheftis

thesamesincesuchanassumptioneliminatestheproblemofadverseselection

discussedaboveTheprobabilityofthefthoweverissomethingthatisalso

influencedbythebehaviorofbicycleownersAnownerwhoiscarelessanddoes

notlockhisherbikeforexampleislikeliertomeetwiththeftthananowner

whoalwaysusesasturdylockAninsurancecompanydeterminesitsratesbasedon

itsjudgmentastowhetherornotbikeownerswillbehavewithsufficientcautionIf

nobikeinsuranceatallwasavailableallownerswouldpresumablyexercise

maximumcareandbuysturdyexpensivelockssothattheirbikescouldntbeeasily

stolenInthiscasetheproblemissolvedbyhavingtheindividualassumethe

entirecostforanunknowndegreeofriskWhatwouldhappenhoweverifan

insurancecompanybegantosellbicycleinsuranceInthatcasethesumthe

individualwouldpayforinsuranceissmallcomparedtothecostofanewbikeIf

worsecametoworseandthebikewasstolenalltheinsuredownerwouldhaveto

doisreportthelosstotheinsurancecompanyandreceivemoneytobuyanew

oneIfinsurancetotallycompensatedforthestolenbicyclehowevertheowner

wouldhaveabsolutelynoincentivetoactcautiouslySituationsinwhichincentives

forcarefulbehaviorarelackingaresaidtoinvolveattmoralhazardTherefore

theprobabilityoflosschangeswhenmoralhazardcomesintothepictureand

insurancereducesapersonsincentivetoavoidorpreventahighriskeventfrom

happeningThisisonereasonwhyinmedicalinsurancecosmeticsurgeryisnot

coveredinpolicies

Whatisimportanttoconsiderhereisthetradeoffinvolvediftheamountthe

lnsurancecompanypaysoutistoolowbikeownersareexposedtoexcessiverisk

7Itshouldbenotedinpassingthatinthecaseofaplumcarthebusinesscommuni

cationagoodsalespersonoughttoadoptistocommunicatetothebuyerfullyallthe

carsgoodpointstothebestofhisherknowledge

281281

ifitistoohighhoweverownersdonotadoptsufficientlycarefulbehaviorIfthe

insurancecompanywereabletomeasurehowcarefullyanindividualwouldbehave

therewouldbenoproblemIntheUnitedStatesforexampletherearedifferent8

insuranceratesforsmokersandnonsmokersThatisthereasoninsurance

premiumsvaryfromonecustomertoanotherButinfactaninsurancecompany

cannotguesshowallitscustomersarelikelytobehaveBecauseamoralhazard

existsfromtheinsurancecompanysperspectiveithasnointentionofproviding

totalcoverageMostcompaniesthereforesetadeductiblethatmakesthecustomer

assum6someoftheriskThecauseofmoralhazardisinformationasymmetryonly

thebikeownerhasinformationabouthisherownbehaviorTheinsurancecompany

cannotpossessindepthaccurateknowledgeabouthowthebikeownerwillbehave

sincethecostofacquiringitwouldbeprohibitiVeTheroleofbusiness

communicationistokeepthosecostswithinreasonablelimitsFromtheinsurance9

companysstandpointthebehaviorofthebikeownerisathiddenactionandthe

distinctionbetweenwhethersheisthecareful @carelesstypeishidden

informationHencetheinsurancecompanymustengageinbusinesscommunication

thataimsforthedisclosureofthatinformationfromthebuyerthebikeownerwho

purchasesinsuranceAcompanycanconductthisbusinesscommunicationinthe

formofconsumereducationOnemethodistorewardacarefuldriverorbike

ownerwithlowerinsurancepremiumsConverselyaninsurancecompanymayalso

cancelpolicieswithcustomerswhohavetoomanyaccidentsormaketoomany

insuranceclaimsSuchpenaltiesforbadbehaviorgiveoutaneffectivesignaland

areyetanotherformofbusinesscommunication

Bethatasitmaywhencompanieswanttosendamessagetotheircustomers

theyuseadvertisingInthatsenseanadvertisementisanimportantformof

businesscommunicationthatlinkscompanytoconsumerorinsomecases

companytocompanyIndeeditisnotanexaggerationinstatingthatadvertisingis

oneofthemostconspicuousandpowerfulformsofcommunicationnotonlyinthe

businesssectorbutalsoinothersocialarenassuchaspoliticsPoliticalfigures

oftenareverynervousabouttheimagethatpeoplearelikelytohaveaboutthem

Inthenextsectionabriefinternationalandinterculturalcomparisonofadvertising

willbetakenupinordertostudyasymmetricinformationfromasociological

8Recentlydifferentrateshavebeenestablishedbetweensmokersandnonsmokersin

Japanalso

9SeeAppendixforabriefanalysis

282

standpoint

8112 282

2AdvertisementasaMeansofBus?@Communication

AmericanvsJapaneseAdvertisement

Aswasjustmentionedadvertisingisameansofbusinesscommunicationbywhich

acompanyletstheworldknowithasgoodproductsThereforebyanalyzing

advertisementwemayobserveanotheraspectofagencytheoryBydefinition

sincetheprincipalisthepartylackingtheinformationandtheagentistheonewith

theinformationwemaythinkofthecompanyorsponsoroftheadvertised

productastheagentmeanwhiletheprincipalwouldbetheconsumerThisis

quiteobvioussincecompaniesthroughadvertisingareconstantlytryingtosendthe

attractiveinformationtoprospectivebuyersthattheirproductsareworth

purchasingFurthermorefromadifferentanglethesponsormaybetheprincipal

andtheadvertisingagencytheagentThatisnotknowingforcertainifthethe

advertisingwillbeeffectivethesponsorriskspayingatremendousamountof

moneytotheadvertisingagencywiththeobjectivethattheinvestmentwillbe

effectiveinbringinghighreturnsinprofit

OnespecialfeatureofJapanesecommercialsistheiruseofcelebritiesand

foreignersTheincomesofsomeofJapanshighesttaxpayersareknowntobe

derivedfromtheirnumerousTVcommercialcontractsWellknownentertainersare

usedtopromoteeverythingfromdetergentstopharmaceuticalstohousemoversto

dentureadhesivesTheirmanagersarebusyrunningaroundliningupcommercial

contractsfortheirclientswhocanbethoughtofasactingasbusiness

communicatorsforcorporationsJapaneseadvertisersalsodonotbegrudgepaying

highapPearancefeestomajorforeignstars

InsteadofadoptinganexplanatoryoranalyticalapProachJapanese

advertisementsareextremelyemotionalandfocusprimarilyoncreatingamood

Adsthatexplainwhatisgoodaboutaproductandtrytomakeconsumerswantto

buyitareintheminorityMostplacetheimageofapopularcelebrityinthe

foregroundandtrytolettheproductrideonthestarspersonalityComparative

advertisingisrelativelyrarePerhapsbecausecreatingagoodmoodoratmosphere

isimportanttheprovocativeornegativeimageofcomparativeadvertisingis

frowneduponThisaversiontoaconfrontationalapproachistruenotonlyof

advertisementsbutofbusinesscornmunicationingeneralinJapan

AlthoughthegrouporientednessoftheJapaneseshouldbecommonknowledge

283283

strangelyenoughalmostnogroupsoranysuggestionofgrouporientednessapPearin

JapaneseadvertisementsAconvincingexplanationforthisisthatconsumersare

thoughtofasaIargegroupandthecelebrityinthecommercialismadetoplaythe

roleoftasteleaderontheirbehalfInshorttheadvertisingstylecanbesaidtobe

basedonthedrawingpowerofcelebritieswhichexploitsJapansgrouporientedness

Aleaderisneededtobeinthevanguardandactasamodelofbehaviorfor

everyoneelseandcelebritiesandotherwellknownpersonalitiesareusedforthis

purposeItisanadvertisingstylebasedontheassumptionthatpopularfigureswill

serveastrendsettersandthemasseswillfollowalongafterthemFromthe

perspectiveofbusinesscommunicationthisstrategyhasmuchincommonwiththe

ideathatifthekeypersoninthegroupyouarenegotiatingwithcanbeconvinced

thatpersonwillputtogetheraconsensusduringsubsequentnegotiations

WellknowncelebritiesontheotherhandalmostneverappearinAmerican

commercialsTheperformersinthemareactorswhospeCializeincommercialsand

haveneitherafamousnameorawel1knownfaceWhatisimportantisnotthe

associationofaproductwithaparticularpersonalityasitisinJapanbutthatthe

actorsshouldblendinasapartofthegeneralpublicBecausetheactorsare

portrayingttordinarypeoplewellknownstarswouldbeobtrusivenotbeingtoo

conspicuousisanimportantpartofthejobForexampleneithertheelderly

womeninthWheresthebeefadforahamburgerChainafewyearsagonorthe

potbelliedmiddleagedmansayingIcantbelieveIatethewholethinginan

antacidadtwocommercialsthatareregardedasclassicswerewellknown

actorsWhatmadethesecommercialssuchbighitsintheUSwasthattheactors

wereporrayinglovabletypeswhocouldbefoundinanyUScityortownThe

AmericanpublicsfirmbeliefthatsuchadswouldIosetheirsalesappealifawell

knownmoviestarhadbeenpushingtheproductsconveyssomeofthespecial

qualitiesofadvertisingandcommunicationsingeneralintheUnitedStatesThe

cultureofthetwocountriesisapparentinthesecommunicationdifferencesbetween

theJapaneseconsumersstraightforwardacceptanceoffollowtheeadercelebrity

adsversustheAmericanconsumersresistancetothemSuchcommercialsalso

revealanotheraspectofAmericansocietythefactthatmostAmericansbelieve

themselvestobetruggedindividualistsInasocietywherethestarisme

commercialsdonotneedstars

AnotherspecialfeatureofAmericanadvertisingiswelirepresentedbythe1991ad

campaigninwhichCocaColaandPepsiColaattackedoneanotherNevertheless

2848112284

despitethetheirconfrontationalstyletheseadssoughttoprovideanobjective

explanationoftheproductsqualitiesAnapproachthatusespricesorresortstoa

hardsellisalsoeffectiveintheUnitedStatesOnemethodthatisoftenusedin

automobileadsistousemoneyasaluretogetcustomersintotheshowroomWe

havereducedourpricesbyfivepercentthismonthandwillgivea300dollarcash

backoncompletionofthesaletoanycustomerwhocomesinthisweekJapanese

consumersdonotseemtor6spondtothistypeofapproach

ForsentimentalJapaneseasocialatmosphereinwhichdisparagingremarksabout

otherpeopleisnotconsideredpropermeansthatexcessivelynegativeadvertisements

aredeliberatelyavoidedItisalsonecessarytoshowrespectfortheelderlyevenin

advertisementsCertainothertendenciescanbenotedsuchasapredilectionfor

copythatusesthekatakanascriptandforeignwordsandaweaknessforfamous

foreigncelebritiesThesefeatUresareinstructiveaboutbusinesscommunication

stylesinJapan

ForaJapaneseperformerarequesttoappearinacommercialisanhonorand

averydesirableoneatthatbecauseitbringswithitfameandfortuneThe

feelingisjusttheoppositeintheUnitedStatesWellknownAmericancelebrities

havetoohighanopinionofthemselvestosinksolowastomakecommercials

Evenwhentheysuccumbtothelureoflucrativeappearancefeesandagreeto

performinaJapaneseadtheydosoontheconditionthatitwillbeshownonlyin

JapanPerhapstheythinkthatplayingtheroleofsomeoneelseinadramaisa

wayofcultivatingtheirtalentsbutthatsayingsomethingtheydontbelieveinin

therealworldsuchaspraisingaproductandrecommendingittootherpeopleis

anundesirableformofcommunication

AdvertisementDirectlyReflectingCulture

Onthewholemethodsofcommunicationreceivestrongsupportfromanations

culturetraditionandwaysofIifeCarefulattentiontosuchmattersaswellasto

uhiversalbusinessrulesplaystheroleoflubricantthatmakesamachinemove

smoothly

AccordingtoDMaheswarancomparingUSandJapaneseadvertisinghe

10ThereareexceptionsAmericanfamousathletesoftenpromoteproductsorcauses

evenintheUSExamplesareMichaelJordanTigerWoodsandMarkMcGwire

IDDurairajMaheswaranComparativeAdvertisingintheGlobalMarketplaceThe

EffectsofCulturalOrientationonCommunicationTheCenterordanSBzasi

nessandEconomicStudies1FyorfeingPaPer2091997

285285

analyzessomespecialfeaturesofJapanesebusinesscommunicationAsttanew

culturalparadigmfirst

1trytoadapttothesocialsituationratherthantakeaconfrontational

posltlon

2beidealisticratherthanrealistic

3usetfuzzY1anguageratherthanpreciseexpressions

4appealtotheemotionsratherthantoreason

Otherspecialfeaturessuchasthestrongdesireforaneatcleanlookanda

rigorousdemandforproductqualityarealsofoundinJapanesebusiness

communicationsInhispaperMaheswaranpointsoutthatinadditiontotheuse

offoreigncelebritiesandtherarityofcomparativeadvertisingbusiness

communicationinJapandoesnotresorttoadirectappealMyownobservations

supporttheviewthatnegativeadsarenothighlyregardedforfearthattheywill

evokeanegativeresponsefromtheconsumer

InfactMaheswarannotesthatcomparativeadvertisingiswideyusedintheUSa2

becauseTheFTCencouragessubstantiatedcomparisonssinceitisbelievedto

providetheconsumerwithobjectiveinformationandfostercompetitionttInhis

paperMaheswaranexaminestheefficacyofcomparativeadvertisingstrategy

advertisingbasedondifferentiationofproductsintheUSUnlikeindividualist

culturesofWesternEuropeandtheUSforcollectivistculturessuchasThailand

andJapancompetitionisbroughtaboutbycooperationthusacomparative

advertisingstrategybasedonassociationsimilarityisfavoredovera

differentiationttdifferencestrategyInadditionUSconsumersarelikelyto

believetheadvertisementifthebrandisanewandunfamiliarproductratherthana

familiaroneInterestinglyenoughtheconverseresultholdsforJapanese

consumerstheyaremorelikelytobelievetheadvertisementifthebrandis

familiarMaheswaransstudyshedslightupontheculturalvariablesthatmustbe

takenintoconsiderationwhenafirmwantstomarketaproductindifferent

countriesInintroducinganewproductitrequirescarefulexaminationofthehost

countryaswellasitscultureandpeopleinorderfortheadvertisementtotrulybe

effectiveThesamecommercialadvertisementmayreceivetotallydifferent

responsesdependinguponitsaudiencewhoarepotentialconsumers

a2TheFederalTradeCommission

2868112286

BusinessCommunicationandLegaiRegulations

TheUnitedStateshasstiffregulationsregardingadvertisingfortobaccoand

alcoholicbeveragesAnadforbeercannotshowanyoneactua11ydrinkingitand

cigarettecommercialshavecompletelydisappearedfromAmericantelevisionscreens

Atonetimeadsthatshowedsmokersexhalingwereforbiddenbut

nonrepresentationaladswereallowedIntheUnitedStatesnearly40yearsago

afterWorldWarIIthetobaccoindustrywasinitsheydayScenesandth6me

songsfromcigarettecommercialsdominatedsocietytheMarlborocountryttad

withitsskillfulblendofsmokingandtheroughmanlinessofthecowboywas

certainlyamasterpieceof @kindLaterthedeleteriouseffectsofsmokingon

healthandarapidriseinautomobileaccidentscausedbydrunkdriverscreateda

socialreactionthatledtorestrictionsonadvertisementsfortobaccoandalcoho1

InJapancampaignsagainsttheevilsofalcoholismandsmokinghavenotyet

achievedasocialconsensusagainsttheseproductsThisdifferenceinpublic

consciousnessshowsitselfclearlyinbusinesscommunicationArecentJapanese

commercialcontainsanexplicitbeerdrinkingscenefromthesoundsofthebeer

beingswallowedtotheemptyglassremovedfromthemouthandahandwiping

awaythefrothfromaroundthemouththecommercialisstagedtoshowjust

howdeliciousthebeerisOnceinawhilethecowboyscenesandthethemesong

ofMarlborocountryttareevenshownonJapanesetelevisionSocialconsciousness

aboutaproductisalwayschangingthoughmanyrevolutionsinAmericantastemay

notalwaysreachasfarasJapanThemeansofcommunicationacorporationuses

toensurethatitsimageoritsproductappealstoconsumersmustalsochangewith

thetimes

Japaneseadvertisingagencieshavevastpowerandauthoritytoadegreethatis

foundalmostnowhereelseintheworldOnereasonforthisisthefactthatthe

sponsorswhodependonadvertisinggiveanimmenseamountoffreedomand

discretionarypowertotheadagenciesInadditionJapaneseconsumersarestrongly

influencedbyadvertisementsTheirdesiretopurchaseaproductisgreatly

influencedbythemoodoftheadregardlessofthequalityoftheproductitself

NeverthelessunlikeAmericanorEuropeanadagenciesthathaveevolvedinto

multinationalsJapanesecompaniesdonothaveoverseassubsidiariesanddependon

localcompaniestomakeadsforthemTheJapaneseservicesectorsadvanceinto

internationalmarketslagsfarbehindthatofJapanesemanufacturersCompanies

thathavetriedtoexpandabroadhavebeenforcedtoretreatHowtoaccountfor

287287

thisfailurefromtheperspectiveofbusinesscommunicationwouldbeaninteresting

taskforthefuture

Intimesofrecessioncompaniesaresaidtocutbackfirstofallonadvertising

expensesentertainmentexpensesandtravelexpensesAllthreeareasaredirectly

relatedtobusinesscommunicationIfwestoptothinkaboutitweshouldkeepin

mindthattheneedforclearandaccurateinformationisessentialpreciselywhen

timesarebad

SummaryandClosingRemarks

BusinesscommunicationinmanyformsarehappeningeverydayWhetheritisthe

negotiationofmajorbanksabouttomergeorsimplythesaleofausedcar

variousfactorsexistinginthebackgroundofthetransactionmustbecarefully

examinedbeforetakingtheinitialstepInthispaperweanalyzedthetypesof

informationgapsorasymmetryofinformationthatoftenoccursWelookedinto

thedisclosureofinformationissuethroughthemarketforlemonscarsandbanks

inwhichboththeobjectiveandsubjectiveasymmetryofinformationproblems

cannotbeavoidedInordertocompensatefornegativesellingconditionssignals

intheformofwarranteesandpricereductionsusedinbusinesstransactionswere

examinedThenextsectionofbusinesscommunicationandinformationasymmetry

existinginthelabormarketprobedintothetopicofhowcompaniesdealwiththe

lackofinformationuponhiringemployeesandhowemployeesseekinghighpay

prestigiousemploymentmusttactfullycommunicatethefavorableinformationsuch

ashavinganMBAinadditiontoalotofexperienceetctotheprospective

employerThefollowingtwosectionsdealtwithmarketfailuresmoralhazardand

adverseselectionandbusinesscommunicationintheinsurancesector

Thelatterhalfofthepapercoveredadvertisementasanexcellentmeansof

businesscommunicationsinceadvertisingenablesacompanytoshowoffits

productsByanalyzingadvertisementwemayobserveanotheraspectofagency

theoryBydefinitionsincetheprincipalisthepartylackingtheinformationand

theagentistheonewiththeinformationwemaythinkofthecompanyor

sponsoroftheadvertisedproductastheagentmeanwhiletheprincipalwouldbe

theconsumerLikewisefromadifferentperspectivesincethesponsorrisksthe

investmentintheadcampaigninthehopesofahighreturninprofititmaybethe

principalandtheadvertisingagencytheagentThenexttwosectionscompared

JapaneseandUSadvertisementwithspecificexamplesdirectlyreflectingculture

2888112288

SpecifictendenciescitingadsinbothcountrieswereillustratedIngeneral

oppositecharacteristicscouldbeobservedbetweenthetwoThereasonbehindthis

isthatmethodsofcommunicationarestronglyinfluencedbyanationsculture

traditionandwaysoflifeUnlikeindividualistculturesofWesternEuropeandthe

USforcollectivistculturessuchasThailandandJapancompetitionisbrought

aboutbycooperationthusacomparativeadvertisingstrategybasedon

associationsimilarityisfavoredoveradifferentiationdifferencestrategy

Thereforeculturalvariablesmustbetakenintoconsiderationwhenafirmwantsto

marketaproductindifferentcountries

Thefinalsectiontakesuptheissueofbusinesscommunicationandlegal

regulationsInmanyinstancestheUnitedStateshasstiffregulationsregarding

adsMeanwhilecuriouslyenoughinJapanwhereonewouldexpectstrictrules

andsupervisionbythegovernmenttheevilsofalcoholismandsmokinghavenot

yetachievedasocialconsensusThisdifferenceinpubl @consciousnessshowsitself

clearlyinbusinesscommunicationTheJapanesewordrashisabehavelike

sumsupJapanesecultureGenerallyspeakingtraditionalJapanesecultureseeks

perfectorderandfrownsuponexceptionsttGirlsaretaughttoactlikegirls

quietandsubmissiveboysaretoactlikeboysttstrongandactiveHusbandsare

expectedtoearnalivingactlikeamanwhiletheirwivessupposedtobe

ladylikecarefortheirchildrenandhusbandsComparedtotheWestern

countriesonlyrecentlyhavewomenincludingwivesandmothersbeguntoenter

orreturntotheworkforcebutevensotheseworkingwomenareintheminority

Withthesetraditiona1sociologicalnormsestablishedandembeddedstronglyinthe

cultureandthereforeineverydaylifeacompanywhetherdomesticorforeign

seekingtonewlyenterthemarketmustfaceatleasttwohurdlesinformation

asymmetryandculturaldifferenceBothtopicsinterrelatedwithculturecanbe

tackledobjectivelywithalittlepatienceandlotsofbackgroundresearch

MathematicalAppendix

1TheMarketforLemons

LetPbethesupplyfunctionofusedcarswhere1priceofnewcarsand

priceofusedcarsThentheequilibriumpricesfornewandusedcars

mustbedeterminedby

DPNPbsPk

13OnlyrecentlyhascigarettesmokingbeenprohibitedindomesticflightsinJapan

289289

DPNPbsuPNPb

wherejlvdemandfornewcarsdemandforusedcarssupplyofnew

carsandequilibriumpriceNoticethatonlytheusedcarslemonswillbesold

inthemarketwhichservesasaselfselection

2Signals

SupPosethatthevalueofagooddependsonobservablesignalsandan

unobservablerandomvariableesothatvse

Thentheexpectedequilibriumpriceisequaltopv

LetXpsandXpbethemarketdemandoftheinformedttconsumersandofthe

uninformedconsumersrespectivelyAlsosupposethattpercentofthemarketis

informedTheninequilibrumweexpectthemarkettoclearwithXstXps1t

XpwhereXthesupplyofthegoodsavailable

3MoralHazard

Letxdenotethelevelofcareexercisedbytheconsumerandpxistheprobabilityof

eventsoccurringwith0WecanwritetheexpectedutilityintheformUVVx

u6where7wealthahdcxcostofcareThentheexpectedutility

problemfortheconsumeristochoosexandalevelofcoverageofinsurancesoasto

maximizetheexpectedutilityThiswillleadtotheoutcomethattheoptimal

policymustbelessthanthetotallossadeductiblepolicytopreventmoralhazard

Appendix

Ingeneraltherearethreemajorcategoriesofasymmetricinformationthe

selectionproblemthehiddenactionproblemandthecostlystateverification

problemThesetypesofproblemsareoftencalledagencorprincipa1agent

problemsTheprincipalisthepartylackingtheinformationandtheagentisthe

onewiththeinformationThisinteractionofprincipalandagentisoriginallypart

ofgametheoryineconomicsandmaybecomequitetechnicalwithmathematical

analyses

Theselectionproblemissometimesconsideredanexanteasymmetric

informationproblernsincetheasymmetryexistsbeforetheinvolvedpartiesenter

intoanagreementwithoneanotherForexamplealthoughinsurancecompanies

finditmoreprofitabletoinsurecarefuldriversasopposedtorecklessonesitis

closetoimpossibletodifferentiatethetwotypespriortothetimeofdrawingup

2908112290

thecontractInthehiddenactionproblemorexpostasymmetricinformation

theasymmetrybecomesapparentafterthepartiesinvolvedenterintoanagreement

withoneanotherForexampleafirmhiringanemployeemaynotbeableto

objectivelyassessthelevelofefforttheemployeehasputintotheworkThe

thirdtypeofinformationproblemthecostlystateverificationproblemmayalsobe

referredtoasanexposttasymmetriconeMostlyobservedininvestmentfinance

wheretheentrepreneurhasanincentivetolieabouthisreturntothesupplierSof

fundsbyclaimingthatsheisunabletopaythemsincetheprojectreturnwaszero

Theoriginofthenamecostlystateverificationisfromthefactthatthe

suppliersoffundsmayfindouttheactualyieldiftheyarewillingtopaythecost

ofsendinginauditorstotheentrpreneursfirm @verifythefiguresAnother

examplewouldbethecaseofaworkerbeingorderedtocompleteaworkwhere

thelevelofdifficultyisnotapparenttotheemployerandtheworkerisonlyableto

seetheactuallevelofdifficultyaftershehasbecomeinvolvedinit

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