Price efficiency

Price efficiency is the concept that the price at which an asset sells should already reflect all public supply and demand information pertaining to it. A variation on the concept states that changes in this information are reflected instantly in the market price, while yet another version states that the price already reflects information that is both publicly and privately available.

Realistically, buyers and sellers may agree to prices that are different from what perfect information about an asset would state that the price should be, which suggests that price efficiency is an imperfect concept. Thus, price efficiency may be skewed by such factors as:

  • The relative need of the parties to a transaction to buy or sell an asset. For example, the seller may be desperate for cash, and so will pay a price lower than the market would indicate is reasonable.
  • The perceived qualitative condition of the asset. The seller typically thinks an asset is in better condition than does the buyer, so the seller wants a higher price than the buyer is willing to pay.

Given these variations on the concept, price efficiency should be considered more of a theoretical than an entirely realistic concept.