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The model makes sense within the limited domain of its assumptions. I find it weird though that it uses an example of autos, because of the hypothetical presen
by b1daly 8y ago
The model makes sense within the limited domain of its assumptions.
I find it weird though that it uses an example of autos, because of the hypothetical presence of asymmetric information, which doesn’t seem to describe the real world well at all.
The quality of cars has risen dramatically and steadily over the years. There are multiple mechanisms which compensate for the difficulties a lay person has valuing a complex product.
In addition to government regulations, brand reputation is hugely important in motivating automakers to make reliable products.
The subject is of keen interest to buyers, who actively seek out information about potential quality of a new car purchase. In the pre-internet area it was harder, but sources of information like Consumer Reports were well used.
Since brand perception is expensive to build, and easy to lose, my anecdotal perception is that automakers try really hard to make great products. Especially because if the sell someone a lemon, the customer will be stuck with it for some time, increasing the opportunity for various types of reputation harming communication.
In the used car market the forces that drive quality are passed right through. While there is perhaps a higher chance of being stuck with a lemon, there are plenty of countervailing forces.
In anycase it struck me as odd that the example the paper used to show the intuition behind it was one that my perspective is almost the opposite of.
I guess the general principle I’m alluding it is that in markets that have a high potential for asymmetric information problems, the problems are obvious, and potential buyers will actively use strategies to compensate.
- argonaut 8y agoThe paper was written in 1970. The car market today is drastically different to the market then.
- brownbat 8y agoYeah, there's a Twilight Zone episode about a used car salesman... Bit of a caricature but makes it clear how that profession was perceived a few decades before CarMax, Carfax, or the proliferation of consumer warranties. https://en.m.wikipedia.org/wiki/The_Whole_Truth_(The_Twilight_Zone) https://en.m.wikipedia.org/wiki/The_Whole_Truth_(The_Twiligh... That said I've recently driven reputable brands that have weird problems dealer mechanics can't even figure out. You can have bad cars with strange problems even today.
- sonnyblarney 8y agoThe point of the paper is not 'cars', it's 'information asymmetry'.
- ucaetano 8y agoThe paper isn't about cars.
- deleted 8y ago[deleted]
- notahacker 8y agoThe whole point of the model is that whilst Consumer Reports etc can tell you that a brand of car is typically reliable, they can't tell you which individual cars are and aren't up to the usual standards. That's the information asymmetry, not just the average person knowing relatively little about cars. And since people try to get rid of the substandard individual cars earlier than the reliable ones (and the resulting lower price of used cars because they're often substandard makes people even less likely to sell good examples), you end up with a disproportionate part of the used car market for, say, Toyotas being made up of the relatively rare examples of Toyotas with build quality issues. Nobody's denying there are also market forces that encourage manufacturers to work on quality control, but forces which make "lemons" disproportionately prominent on the used car market exist unless and until the entire production run is defect-free. Cars were probably chosen as the example because they are and were the most prominent example of a market for second hand goods, and one where non-obvious differences in quality between individual examples of the same product obviously matter.
- nabla9 8y agoIt seems like you failed to recognize that the example uses market for _used_ cars as an example. You are thinking market for new cars. Lemon market conditions are quite common. Averse selection is now seen as a fundamental cause of market failure. For example corporate securities markets, insurance markets, virtually all resale markets and housing markets specially suffer from the adverse selection to some degree.
- cuchoi 8y agoIt is hard to tell if _used_ car A is better than _used_ car B. For example: did the owner change the oil regularly? Other examples: - How do you know if that used sofa online has bed bugs? - This is also why people that was fired (even for reasonable reasons) has more trouble finding a job -- you don't want to end up with a lemon. "Peaches" are less likely to be fired. - This is also why people like explanation such as "selling because I am leaving the country" -- it gives them a reason to believe your car/mattress/pressure cooker it is not a lemon.