How A Lie Sent Theranos Crushing Down
By: Chris Mcqueen
Tags: Politics, Business, Fraud, Life Lessons, Bankruptcy

Information Economics

Holmes was the only person in the company who had complete information. Employees often only had information about their own project. Different development teams were not supposed to communicate with each other on Holmes’ instructions. Still, to report exclusively to her.

Not, even the supervisory board was aware of the exact functionality of the blood analysis devices. Although it was staffed with high-ranking members, only one expert from the medical field was on the supervisory board until 2016.

Also, the Supervisory Board generally had little influence. In an interview in which Holmes was asked about the Supervisory Board's role, Peer review is a quality assurance procedure by independent experts in the same field; she describes it as a “placeholder”. She had the final word in the company.

In 2013, Holmes forced a resolution that gave her 99.7 per cent of all voting rights. This meant that the supervisory board had no quorum without Holmes.

This illustrates that even within the company, information asymmetries existed.

Holmes was the only one who was fully aware of the functioning of the analytical equipment. This internal information policy probably served to keep up the appearance of an innovative start-up as long as possible and towards external stakeholders.

Holmes was able to attract numerous well-known investors such as Rupert Murdoch, Betsy DeVos and the Walmart family. The investors believed in the product and its implementation.

However, they did not question the functionality and trusted Holmes’ reports. There is no question that these same investors would not have invested their money in Theranos if they had complete information.

The existing information asymmetry, which directly affects the product, resulted in investors' willingness to invest. The information asymmetries are present in the Theranos case to varying degrees.

On the one hand, customers were deceived concerning the product even before the contract's conclusion (ex-ante).

On the other hand, the deception was maintained after the contract's conclusion (ex-post) by concealing the fact that the tests were actually carried out on manipulated Siemens devices (hidden action).

Under the assumption of full information, Theranos would hardly have been able to win over the number of customers and business partners they could actually acquire.

After all, they were deceived about the actual value of the product.

The offer Theranos placed on the market generated a demand for a product that did not exist.

This demand, which is due to the wrongly assessed value of the product, has a positive effect on the market's pricing from the company’s point of view.

Even though Theranos was not the only supplier of blood analysis equipment, the company was the only supplier of analysis equipment that could deliver a result in such a simple way.

This would at least suggest a monopolistic position—the targeted misinformation results in one’s own advantage.

Medical goods are primarily characterized by trustworthiness. Theranos produced medical devices that were not properly assessed.

Laypersons lack the technical knowledge to understand the functionality of a blood analysis device. An evaluation of the good could not occur; neither before nor after a blood test was performed on the Theranos device.

The procurement of information for external stakeholders was equally difficult.

In general, Holmes always tried to maintain the existing asymmetries.

Employees who tried to obtain information were either fired or dismissed.

This is well illustrated by Tyler Shultz, grandson of former US State Department consultant Georg Shultz. Shultz became aware of how Holmes affected employees and board members and turned to his grandfather, a member of the Theranos supervisory board.

The latter did not want to listen to his grandson; Tyler Shultz was immediately dismissed, as were many other Theranos employees before him who had already asked unpleasant questions.

Tyler later helped expose the fraud.