The Market for Lemons

Interesting, but there seem to be a lot of assumptions baked into the default &quot;used car market&quot; example, that don&#x27;t necessarily hold up. For example, the idea that the owner knows whether they hold a &quot;peach&quot; or a &quot;lemon&quot;. Clearly he&#x2F;she has <i>some</i> idea, but they definitely do not have perfect knowledge of this. In fact, this very lack of knowledge (&quot;how many more miles will I get out of this car before the transmission falls out?&quot;) may be the reason the owner has chosen to manage risk by buying a newer car. But the actual answer to that question could be anywhere from &quot;1 more mile&quot; to &quot;another 250,000+ miles&quot;.<p>Likewise, this statement:<p><i>Given the fixed price at which buyers will buy, sellers will sell only when they hold &quot;lemons&quot; (since plemon &lt; pavg) and they will leave the market when they hold &quot;peaches&quot;</i><p>is iffy. As the owner of a used car, I may choose to buy a newer car for any number of reasons, including just wanting something to impress my peers, or impress members of the opposite sex, whatever. Say I buy a nice, sexy, new sports-car. I don&#x27;t need my old car anymore, regardless of whether it is a peach or a lemon. But my decision to sell it may not involve its status as &quot;peach&quot; or &quot;lemon&quot;. It may simply be that I don&#x27;t want to pay property taxes and registration fees on a car I&#x27;m not using. Maybe I just don&#x27;t have anywhere to park a second car. Or maybe I&#x27;m just feeling generous and want to help somebody else out by selling them my no-longer-needed car.<p>All of that said, I&#x27;m sure the math is valid and this theory has uses... but this used car thing feels a little dodgy.

The model makes sense within the limited domain of its assumptions.<p>I find it weird though that it uses an example of autos, because of the hypothetical presence of asymmetric information, which doesn’t seem to describe the real world well at all.<p>The quality of cars has risen dramatically and steadily over the years. There are multiple mechanisms which compensate for the difficulties a lay person has valuing a complex product.<p>In addition to government regulations, brand reputation is hugely important in motivating automakers to make reliable products.<p>The subject is of keen interest to buyers, who actively seek out information about potential quality of a new car purchase. In the pre-internet area it was harder, but sources of information like Consumer Reports were well used.<p>Since brand perception is expensive to build, and easy to lose, my anecdotal perception is that automakers try really hard to make great products. Especially because if the sell someone a lemon, the customer will be stuck with it for some time, increasing the opportunity for various types of reputation harming communication.<p>In the used car market the forces that drive quality are passed right through. While there is perhaps a higher chance of being stuck with a lemon, there are plenty of countervailing forces.<p>In anycase it struck me as odd that the example the paper used to show the intuition behind it was one that my perspective is almost the opposite of.<p>I guess the general principle I’m alluding it is that in markets that have a high potential for asymmetric information problems, the problems are obvious, and potential buyers will actively use strategies to compensate.

Hidden information? I made it crystal clear what the car was.<p><a href="https:&#x2F;&#x2F;imgur.com&#x2F;a&#x2F;NQuVomI" rel="nofollow">https:&#x2F;&#x2F;imgur.com&#x2F;a&#x2F;NQuVomI</a>

This explains the way consumer app markets go.<p>App stores cause downward pressure on average prices of apps. Free now being most common.<p>This drives away high quality app developers where the consumer and the business interests align.<p>Now there is only a market for user hostile, free consumer software due to this feedback loop reaching its end.

I wonder if there&#x27;s a tipping point in information asymmetry where the theory becomes irrelevant. Sellers will almost always have more information than buyers about a specific instance of a product, but there comes a point in a market where buyers have ENOUGH information to avoid buying a lemon, and so can adjust their offer based on that information and disrupt the feedback loop that drives peach owners out of the market.<p>As an example, you probably could have done very well for yourself in 2009 buying mortgage-backed securities that didn&#x27;t include any subprime loans. The securities may have had other problems, but at some point there was enough information available to stop buying the lemon securities for subprime loans and pay a bit more than p.avg for the security if it wasn&#x27;t backed by subprime loans. Information asymmetry still exists, but there&#x27;s enough information available to avoid making a catastrophic purchase.<p>So it&#x27;s almost like the market for lemons is forced to self-correct, because the quality of the product in the market will necessarily drop until it becomes obvious to the buyers what attributes distinguish between a lemon and a peach.<p>So maybe the chief lesson in The Market for Lemons is if it looks like a market is all peaches, you shouldn&#x27;t buy anything at all until you&#x27;ve found a few lemons, and there&#x27;s money to be made in that market if you can distinguish between peaches and lemons before anyone else.<p>So is information asymmetry really just a market opportunity for a savvy buyer?

Buying things on Amazon seems like a similar problem, multiple third parties, cheapest price, fake reviews or different versions being grouped together under one set of reviews

The first thought I had when reading this was that this can apply to some online dating apps.

&quot;Examples given in Akerlof&#x27;s paper include the dearth of formal credit markets in developing countries, and the difficulties that the elderly encounter in buying health insurance&quot;...may someone please shed some light on these two?

I think this applies not only to Markets but also to something like Politics and Politicians ... &quot;the bad drives out the good.&quot;

This theory breaks quickly when seller or buyer needs to do transaction urgently for many possible reasons.<p>There was a guy (in a city I used to live) who drove by a Porsche he likes and asked how much? Lady asked him if he wants to see other cars. It happened that her husband just died and she wanted to get rid of his estate worth of luxury cars that she hated. The guy borrowed money from his relatives and ended up with about dozen of rare&#x2F;luxury&#x2F;sports cars for pennies at a dollar.

&gt; [...] Then they are only willing to pay a fixed price for a car that averages the value of a &quot;peach&quot; and &quot;lemon&quot; together (p_avg).<p>So every used car has the same price?