The Market for Lemons

0atwong • 22nd Apr 2007 • Conversation Pieces

How Security Companies Sucker Us With Lemons -
In 1970, American economist George Akerlof wrote a paper called “The Market for Lemons” abstract and article for pay here, which established asymmetrical information theory. He eventually won a Nobel Prize for his work, which looks at markets where the seller knows a lot more about the product than the buyer.

Akerlof illustrated his ideas with a used car market. A used car market includes both good cars and lousy ones lemons. The seller knows which is which, but the buyer cant tell the difference — at least until hes made his purchase. Ill spare you the math, but what ends up happening is that the buyer bases his purchase price on the value of a used car of average quality.

This means that the best cars dont get sold; their prices are too high. Which means that the owners of these best cars dont put their cars on the market. And then this starts spiraling. The removal of the good cars from the market reduces the average price buyers are willing to pay, and then the very good cars no longer sell, and disappear from the market. And then the good cars, and so on until only the lemons are left.