The Lemon Principle and Market Failure In The Used Car Industry
Imagine if you were buying a used car and suddenly someone approached him on the street and said a brave statement: "Used in the car market only selling low-quality cars." Do you agree with this statement?
Well, there are reasons to believe that this statement has everything!
According to a workshop called The lemon market: Quality Uncertainty and Market Mechanism written in 1970, George Akerlof, a professor of economics at the University of California, Berkeley, uses market failure in the automotive industry, and thus the claim that "bad" cars may exist in the used automotive industry , can actually be mathematically tested. This role also won him a Nobel Prize in 2001!
In this paper, George uses the term to denote lemons for jackpot cars (Limón is actually an American slang used to represent a bad car), and the term Peach Cards denotes quality. Sellers who sold second-hand cars to the used car market are very well aware of the quality of the car sold; Sellers know if they sell lemon or peach used cars because they have already driven their car.
Unfortunately, these second-hand car buyers can not determine the exact car quality; Your knowledge of the quality of used cars is not as complete as the vendors. In other words, asymmetric information exists between buyers and sellers; Sellers know more about their cars than buyers.
This difference in knowledge and information regarding the quality of cars is of paramount importance for car pricing and car dealings. Sellers that are very good that your car is Peaches want to sell their cars at higher prices, but sellers who know very well that your car is lemons will be willing to accept a lower price to sell your used car with low quality knowledge.
But as a buyer can not determine the quality of the car, you will not be willing to pay the full price to the seller who sells this peach and ultimately pay somewhere under a fair price peacock orders.
Let me illustrate the dynamics of this buyer and seller with a brief example.
Imagine being a used car buyer. You met Patrick who wants to sell his peach. As Patrick knows that Peach is going to sell, he will need a high price (say, $ 20,000) to sell his car. But because, the buyer, can not know if the car is in Persia, so he does not want to risk paying a high price of $ 20,000 to buy a car. He will tell Patrik that, since there is a possibility that he can buy Lemon, he only wants to pay a lower car cost of $ 15,000.
As a result, Patrick does not want to accept his $ 15,000 offer for Pecs, which is unlikely to happen.
But if Patrick knows he is selling Lemon, he will be ready to share with his car for $ 10,000. In this case, thanks to the fact that it offers $ 15,000, Patrick will be happy to sell his car and the deal will be closed.
Keep in mind that I simplified this example to show only the nature of the buyer and seller dynamics. US $ 15,000, buyers average market price of used cars will stop paying and is calculated based on the car's adjustment value would be expected, assuming 50% of the cars sold is peaches and 50% of the cars sold in lemons and that after all the pectorals and the price of the average lemon collection The peach price is $ 20,000, and the average price of the lemon is $ 10,000. This simplified example can be proved mathematically.
Therefore, the automobile industry has not been successful, because no Pecs owner does not want to sell their high quality cars, if they know that they will receive, on average, a rate that is lower than what their peaches justify. But Lemon owners will be happy to sell their cars, because on average they will receive a higher rate so they can drive low quality cars. The lemons have effectively changed Peach, the average quality of the cars sold has decreased compared to the quality of the lemon, and this market failure has occurred in the used car market.
Returning to the statement we presented in the introduction to this article: "Only low quality cars are sold in the used car market!" On average and in general, this statement is true, at least based on the story written by George Akerlof. George Acerlof called this dynamic lemon principle.
About the Author
Kwan Hong helps professionals, business leaders and young people to quickly learn communication skills, personal achievements and professional advancements. He has been successful in seminars and facilitated seminars on public speaking, communication skills, leadership, personal growth, business and commercial development. He has synthesized the knowledge of 8 degrees and diplomas, more than 100 certifications and 1,000 books to offer his clients the best tips, tricks and techniques of personal success.
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