"The Market for Lemon: Quality Uncertainty and Market Mechanism " is a well-known 1970 paper by economist George Akerlof who examines how the quality of traded goods on the market may decline in the presence of information asymmetry between buyers and sellers, leaving only "lemon" in back. In American slang, lemons are cars that are found to be damaged only after they are purchased.
Suppose the buyer can not distinguish between high quality cars ("peach") and "lemon". Then they are only willing to pay a fixed price for cars that average the value of "peach" and "lemon" together ( p average ). But the sellers know whether they hold peaches or lemons. Given the fixed price at which the buyer will buy, the seller will sell only when they hold the "lemon" (because p lemon Ã, & lt; Ã, p avg ) and they will leave the market when they hold "peaches" (because p peach & gt; p averages ). Finally, since enough sellers of "peach" leave the market, the average buyer's willingness to pay will decrease (because the average quality of cars in the market declines), which causes more high-quality car salespeople to leave the market. market through positive feedback.
Thus the price of less informed buyers creates a problem of adverse selection that drives high quality cars from the market. The wrong selection is a market mechanism that can lead to market collapse.
Akerlof's paper shows how prices can determine the quality of goods traded on the market. Low prices drive away the high quality merchandise, leaving only the lemon in the back. Akerlof, Michael Spence, and Joseph Stiglitz jointly received the Nobel Prize Memorial in Economics in 2001, for their research related to asymmetric information.
Video The Market for Lemons
Papers
Thesis
Akerlof paper uses the market for used cars as an example of quality uncertainty issues. Used cars are cars where ownership is transferred from one person to another, after a period of use by the first owner and the inevitable wear. There are good used cars ("peaches") and damaged cars ("lemons"), usually as a consequence of some non-traceable variables, such as owner's driving style, quality and frequency of maintenance, and accident history. Because many important mechanical parts and other elements are hidden from view and not easily accessible for review, car buyers do not know in advance whether it is peach or lemon. Thus, the best estimate of buyers for a given car is that the car is of average quality; thus, he will be willing to pay only the price of a car with a known average quality. This means that car owners are used with caution, never misused, and either will not be able to get a price high enough to make the sale of the car worthwhile.
Therefore, good car owners will not put their cars in the used car market. A good car withdrawal reduces the average quality of cars on the market, causing buyers to revise down their expectations for any given car. This, in turn, motivates car owners well enough to not sell, and so on. The result is that markets where there is asymmetric information with respect to quality exhibit characteristics similar to those described by Gresham's Law: the bad drive away the good. (Although Gresham's principle applies more specifically to exchange rates, a modified analogy can be drawn.)
Abstract problem statistics
Akerlof mempertimbangkan situasi di mana permintaan D untuk mobil bekas tergantung pada harga mobil p dan kualitas µ  =  µ ( p ) dan persediaan tergantung pada harga saja. Ekuilibrium ekonomi diberikan oleh S ( p )  = D ( p , µ i>) dan ada dua kelompok pedagang dengan utilitas yang diberikan oleh:
where M is the consumption of goods other than cars, x car quality and n the number of cars. Let Y i , D i and < i> S i into earnings, requests and bids for the i group. Assuming that utility is linear, that the trader is the utility maximizer of Von Neumann-Morgenstern and that the price of other M items is unity, the request D 1 for car is Y 1 / p if ? / p & gt; Ã, 1, if not null. Request D 2 is Y 2 / p if 3 ? / 2 Ã, & gt; p , if not null. Market demand is given by:
Group 1 has N cars for sale with quality between 0 and 2 and group 2 does not have a car for sale, therefore S 1 = < i> pN /2 and S 2 Ã, = Ã, 0. For a certain price p , the average quality is p /2, and therefore D Ã, = 0. The market for used cars collapsed when there was asymmetric information.
Asymmetric information
The paper by Akerlof explains how the interaction between heterogeneity of quality and asymmetric information can lead to a loss of a market where the guarantee is unlimited. In this model, because quality is indistinguishable by the purchaser (due to information asymmetry), there is an incentive for sellers to lower low-quality goods as high-quality items. Buyers, however, consider these incentives, and take the quality of the goods to be uncertain. Only the average quality of goods will be considered, which in turn will have the side-effects that goods that are above average in terms of quality will be expelled from the market. This mechanism is repeated until the trade balance is not reached.
As a consequence of the mechanism described in this paper, the market may not exist at all in certain situations involving quality uncertainty. Examples given in Akerlof's paper include markets for used cars, the scarcity of the formal credit market in developing countries, and the difficulties faced by parents in buying health insurance. However, not all players in a particular market will follow the same rules or have the same quality judgment ability. So there will always be distinct advantages for some vendors to offer low quality goods to less-informed market segments that, on the whole, appear to have reasonable quality and have reasonable assurances of certainty. This is part of the basis for idiom buyers beware.
This may be the basis for the idiom that the informed consumer is a better consumer. This example may be the subjective quality of good food and wine. Individual consumers know what they prefer best to eat, and quality is almost always judged in a good place by smell and taste before they pay. That is, if the customer in a good company orders the lobster and the meat is not fresh, he can send the lobster back to the kitchen and refuse to pay it. However, the definition of 'highest quality' for food providers is not accepted. Thus, a large number of restaurants with better quality and higher prices are supported.
Impact on market
This article draws some conclusions about the cost of market dishonesty in general:
Maps The Market for Lemons
Critical reception
George E. Hoffer and Michael D. Pratt stated that "the economic literature is divided on whether the lemon market actually exists in used vehicles". The authors' research supports the hypothesis that the "known defect provisions", used by US states (eg, Wisconsin) to regulate used car sales, have become ineffective, since the quality of used vehicles sold in these states is not significantly more either than vehicles in neighboring countries without such consumer protection laws.
Both the American Economic Review and the Review of Economic Studies rejected the paper for "futility", while reviewers for the Political Economy Journal dismissed it as false, on the grounds that, if this paper is true, then there are no items that can be traded. Only at the fourth attempt, the paper was published in the Quarterly Journal of Economics. Today, this paper is one of the most widely cited papers in modern economic theory and the most widely downloaded economic journal paper of all time in RePEC (more than 8,530 citations in an academic paper in May 2011). This has greatly affected almost every area of ​​the economy, from industrial organizations and public finance to macroeconomics and contract theory.
Criticism
Libertarians, like William L. Anderson, oppose the regulatory approach proposed by paper authors, observing that some used car markets have not been broken even without the lemon law and that lemon issues create entrepreneurial opportunities for alternative markets or knowledgeable customer customers.
Provisions for the lemon market
The lemon market will be produced as follows:
- Information asymmetry, where no buyer can accurately assess the value of a product through an inspection before a sale is made and all sellers can more accurately assess the value of the product before the sale
- Incentive for sellers to produce low quality products as high quality products
- Sellers do not have credible disclosure technology (sellers with great cars have no way to express this credibly to buyers)
- Either the existing seller's quality of seller or the average seller type is low enough (buyers are quite pessimistic about the quality of the seller)
- Lack of effective public quality assurance (by reputation or regulation and/or effective warranty )
Legal in United States
Five years after Akerlof's paper was published, the United States adopted a federal "lemon law" (Magnuson-Moss Guarantee Act) that protects citizens from all states. There are also state laws on "lemons" that vary by country and may not always include used or leased vehicles. The right granted to the consumer by "lemon law" may exceed the warranty specified in the purchase contract. This state law provides consumers with solutions for cars that repeatedly fail to meet certain quality and performance standards. "Lemon Law" is a common nickname for this law, but each country has different names for laws and actions, which can also include more than just cars. In California and federal law, the "Lemon Law" includes anything mechanical.
The federal "lemon law" also states that warrants may be obliged to pay attorneys' fees from parties applicable in the lemon lawsuit, like most lemon state laws. If the car has to be repaired for the same defect four times or more and the problem still occurs, the car can be considered "lemon". Such defects must substantially inhibit the use, value, or safety of the vehicle. Buyers who consciously buy a car in the "as is" condition receive a defect and cancel their rights under "lemon law".
See also
- The options are reversed
- Confusopoly
- Death Spiral (insurance)
- Highest quality is lowest cost
- Shared tragedy
- Transaction fees
- Transparency (market)
- Open data
References
Source of the article : Wikipedia
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