What is the secret of the lemon market?


Global Lemon & Lime Market 2019 - South Africa Overcomes Argentina In The  Top-Exporter Ranking - Global Trade Magazine

How did the lemon market come into being? If in a commodity market, the seller has more complete and comprehensive information, and the buyer has less information than the seller, the balance of information between them is unbalanced, which forms the lemon market.

This serious asymmetry of information will lead to market shrinkage and eventually disappear. Because in such an unhealthy market, those high-quality goods are replaced by those low-quality low-grade goods, leaving only low-quality goods in the final market. This phenomenon is also called adverse selection, which is a concept in information economics.

Next, let's analyze why such a market exists, and what is the underlying reason behind it?

As buyers, we do not know the real value of the goods in most cases, at least compared with sellers, we have too little information. Therefore, the popular average price recognized by everyone in the market becomes the reference object when we buy goods. It is precisely because it is difficult for us to distinguish whether the goods are superior or inferior. We are unwilling to pay the seller a price higher than the average price, that is, the average price is the bottom line for us to pay. Compared with those sellers whose value of goods is above the average price, those sellers whose value of goods is below the average price suffer a lot from the former, while those sellers whose value of goods is below the average price are profitable. Knowing this hidden rule, no seller in the market is willing to provide high-quality goods. As a result, the average quality of goods on the market has become inferior over time, and the average price is naturally lower.

The buyer's mentality is that there is no good product in the market. Even if they put good quality products in front of them, they may not fully believe it. As a result, 90% of the products they buy may be inferior.

Let's give an appropriate example to elaborate on this problem. As a buyer, you want to buy a used car. You are skeptical of what the seller said. The seller is also very unhappy with your constant bargaining. In the face of your price increase, he can only give you the car with poor quality. You are a buyer of this idea, and so are many other buyers.

The Lemons Problem

What are the drawbacks of the lemon market?

The final result of the lemon market is that the market shrinks and eventually disappears, but at the same time, the moral crisis is quietly attacking buyers and sellers. The emergence of the lemon market will only make this part of the group grow stronger and stronger. Buyers seem to be the object of their play. They cheat buyers at will by virtue of holding more information. In the long run, buyers also slowly distrust sellers. If every industry has such "small problems", the most likely to condense into "big problems" of the entire industry chain.

A Market for Lemons: George Akerlof, Information Asymmetry, Imperfect  Information & Market Failures - YouTube