Second-Hand Markets and Resale
The Lemons Problem
Because sellers know more about a used product's quality than buyers do, buyers fear getting a bad one, which can shrink the market.
A Nobel-winning insight.
Akerlof’s idea
In 1970, George Akerlof showed that when buyers cannot tell good used cars from bad ones (‘lemons’), they offer only an average price.
Result
Owners of good cars refuse to sell at that price, so mostly bad cars remain.
Spiral
The market can shrink or fail.
Fixes
Warranties, inspections, certification and reputation reduce the problem.
A used car
A buyer suspects the seller is hiding defects and offers a low price, discouraging owners of good cars.
Assuming markets always work well without information
Missing information can break them.
Key takeaways
- Sellers know more than buyers.
- Buyers fear lemons.
- Good sellers may exit.
- Certification helps.
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