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related: https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons > Suppose buyers cannot distinguish between a
by shoo 7y ago
related: https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons
> Suppose buyers cannot distinguish between a high-quality car (a "peach") and a "lemon". Then they are only willing to pay a fixed price for a car that averages the value of a "peach" and "lemon" together (p_avg). But sellers know whether they hold a peach or a lemon. Given the fixed price at which buyers will buy, sellers will sell only when they hold "lemons" (since p_lemon < p_avg) and they will leave the market when they hold "peaches" (since p_peach > p_avg). Eventually, as enough sellers of "peaches" leave the market, the average willingness-to-pay of buyers will decrease (since the average quality of cars on the market decreased), leading to even more sellers of high-quality cars to leave the market through a positive feedback loop.
> Thus the uninformed buyer's price creates an adverse selection problem that drives the high-quality cars from the market. Adverse selection is a market mechanism that can lead to a market collapse.
- double0jimb0 7y agoI wonder if Bezos has thought this through fully for Amazon.com
- lstamour 7y agoAmazon always makes money on the transaction. Assuming transactions are cheaper, the customer will be able to spend more. Nothing is cheaper or more expensive than AWS in this regard. That said, Amazon does need to and should improve to remove bad products and bad customer experiences beyond what gets returned or hits the bottom line. It’s not right when a brand has to “compete” with knockoffs using identical package design and item listings, especially as the customer buying the item has the least information about the quality of the item they’re buying — the two coins are not of identical value, as it were.
- chii 7y ago> Adverse selection is a market mechanism that can lead to a market collapse. if an uninformed buyer buys a lemon, and they don't suffer the consequences (e.g., a lemon works just as well as a peach, 'cept in aesthetics or some other unimportant metric), then it's not collapsing the market at all. It just means that peaches, as judged by sellers, aren't as valuable as they think. It's like the stock market in this sense - buyers of a stock doesn't "really" know if the stock is a lemon or a peach. Neither does the original owner of the stock of course.
- ptx 7y agoIt could be that the buyer doesn't suffer the consequences until much later, or that they are suffered only in aggregate by buyers. For example: cheap smoke detector that doesn't detect smoke, cheap food full of lead contamination, cheap software full of buffer overflow vulnerabilities.
- dredmorbius 7y agoAkerloff's work is a special case of Gresham's Law. There are other cases where uncertainty my be general amongst both or all actors, rather than asymmetric as Akerlof discusses.