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The Market for Lemons - as applied to I.M.

by The Copy Nazi Banned
7 replies



I'm not much of an egg-head. I read an awful lot but I don't usually delve into abstracts and higher learning edjukational stuff. Does my head in. (And I think leather elbow patches on corduroy jackets look decidedly naf.) But this study...this paper...this abstract...I find very interesting.

"The Market for Lemons: Quality Uncertainty and the Market Mechanism" is a 1970 paper by the economist George Akerlof.

Its about information asymmetry - which occurs when the seller knows more about a product than the buyer.

(You do know that Lemon is a slang term for a sub-standard car I presume)

Akerlof and his team received the Nobel Prize for Economic Sciences in 2001 for this paper.

In the paper they use the Used Car market as an example of the problem of quality uncertainty.

In a Nutshell:


Imagine that owners of Lemons (defective cars) are willing to sell for $1000 and owners of Plums (good cars) are willing to sell for $2000.



Imagine that purchasers are willing to pay up to $1200 for a Lemon and up to $2400 for a Plum.



Assume that sellers know what kind of car they have, but buyers can't tell. All buyers know is that half of all used cars are lemons.



Therefore, based on the expected probability that a given car is a lemon, they will pay only up to $1800 for any car (1/2 of $1200 + 1/2 of $2400).



But plum owners aren't willing to sell for only $1800, so only lemon owners will sell.



The logical conclusion is that only the lemons will be sold and the equilibrium price (where Supply meets Demand)will be between $1000 and $1200.



The mere presence of inferior goods destroys the market for quality goods when information is imperfect.



Therefore Plum owners need some way of signaling their car's quality.


What's the Solution?


Cherry pick (pun intended) amongst these -


  • warranties/guarantees
  • brand names/chains
  • certification - diplomas, JD Powers (consumer surveys), credit reporting, government certification agencies (FDA) and licensing.
(I guess you can wrap most of that up under Branding and Positioning. And add some Merchandising or Packaging.)

Here's where I go all Egg-Head on you -


To put this in terms of X and Y, asymmetric information (X) leads to adverse selection (Y).
  • Asymmetric information: The buyer and seller have unequal information about the vehicle's type.
  • Adverse selection: The buyer risks buying a car that is not of the type he expects--e.g. buying a lemon when he thinks he is buying a plum.

In plain English - the " lemon principle" is that bad cars chase good ones out of the market - owners of good cars will not place their cars on the used car market.


So...my question to you is - Are the Lemons of Internet Marketing forcing the Plums of Internet Marketing out of business?

Discuss.

Cheers,

Professor Lambe

p.s. the market for lemons is actually how the Sicilian Mafia got its start - according to this study.
#applied #lemons #market
  • Profile picture of the author Steve Hill
    Very interesting paper, Professor Lambe.

    An essential takeaway from this paper is while dishonesty in the market may drive away legitimate businesses, it leads to merchants becoming entrepreneurs, able to identify the quality of inputs and certify the quality of outputs.

    Marketplace dishonesty also leads to the rise of brand-name positioning, where perceived quality and value lies with the brand name, and consumers have trust in products offered under that name. Guarantees also serve as counter-actions because the risk is assumed by the seller, rather than the buyer. Licensing practices also serve to reassure buyers.

    The common element here is trust. As Mr. Akerlof states, given the dampening effects of lemons in the marketplace, informal written guarantees are preconditions for trade and production.

    My conclusions? To succeed in any marketplace with lemons, it is absolutely necessary to build trust and offer a solid guarantee. Those with a trustworthy brand will find it far easier to introduce new products into the marketplace. As the financing examples demonstrated, it is necessary to know your market prior to entry, or be prepared to absorb initial losses during the learning process.

    While these same basic principles of sound business have been explained elsewhere time and again, it was quite interesting to see the mathematical reasoning behind it.
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  • Profile picture of the author The Copy Nazi
    Banned
    Steve, did you notice the last line of copy in the Bill Bernbach ad? "We pluck the lemons; you get the plums". Written 1960 - ten years before Akerlof's paper. More here - Writing for Designers › Lemon
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    • Profile picture of the author Steve Hill
      Originally Posted by The Copy Nazi View Post

      Steve, did you notice the last line of copy in the Bill Bernbach ad? "We pluck the lemons; you get the plums". Written 1960 - ten years before Akerlof's paper. More here - Writing for Designers › Lemon
      I did see that before, but didn't note the time difference. It makes me wonder how long lemons have been associated with bad products (sour) while (sweet) plums and peaches have the positive connotations.

      A lemon car, a plum job, a peachy day. Two out of three isn't bad!

      There are some good books on Volkswagen ads, just because they were so different for their time. It's interesting to note they do play off the same concepts Mr. Akerlof raised ten years later, by assuring the buyer that they won't get a lemon.

      The early 70's (about the time of the paper) were notorious for poorly-made cars, so lemons were a timely topic:

      The Worst Cars Of All Time - Forbes.com
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  • Profile picture of the author copyassassin
    Originally Posted by The Copy Nazi View Post


    So...my question to you is - Are the [/FONT] [FONT=Courier New]Lemons of Internet Marketing forcing the Plums of Internet Marketing out of business?
    Mal,

    I think it's a "yes" & a "no".

    The market for great quality will increase. Mastermind/coaching/personalized service will increase.

    The market for good quality will go down. Because why bother with "good".

    In other words, I think the top of the market (1%'ers) will expand it's share at the expense of the rest of the 19%'er's.

    I also believe the demand for poor quality products will increase.

    For example, the WSO section is growing at a very healthy rate; although, the products are on the lower end. It's just rehashed info (and more importantly, not timely)

    I think the smart marketer will have a vast product line from $7 to $70,000.

    I think the market is that spread out.
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  • Profile picture of the author angiecolee
    I couldn't read the first paper - got a "page could not be found" error. Fascinating stuff though. With the logic presented, it makes sense that IM lemons could be intimidating plums into leaving - poorly made product, scams, etc. are enough to make just about everyone skeptical. But this formula doesn't account for the stubborn among us, I think. LOL Some see a lemon problem and run. Some see it and take it head on - much like the Japanese car makers who decided there was no reason a car couldn't be beautiful, functional, AND affordable.
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  • Profile picture of the author Marvin Johnston
    I got the 404 error too. But a quick search on the site for the PDF file gave a working link:

    http://www.iei.liu.se/nek/730g83/art...tforLemons.pdf

    No time to read it right now, but it is on the desktop now waiting.

    Marvin
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