Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.1 6/24/83; site mmintl.UUCP Path: utzoo!linus!philabs!pwa-b!mmintl!franka From: franka@mmintl.UUCP (Frank Adams) Newsgroups: net.politics.theory Subject: Re: The free market Message-ID: <748@mmintl.UUCP> Date: Mon, 28-Oct-85 19:52:41 EST Article-I.D.: mmintl.748 Posted: Mon Oct 28 19:52:41 1985 Date-Received: Thu, 31-Oct-85 22:57:37 EST References: <225@gargoyle.UUCP> Reply-To: franka@mmintl.UUCP (Frank Adams) Distribution: net Organization: Multimate International, E. Hartford, CT Lines: 35 Summary: Why used cars are sold [Not food] In article <225@gargoyle.UUCP> carnes@gargoyle.UUCP (Richard Carnes) writes: >"[Akerlof] argued that the seller of a used car knows whether or not >it is a lemon; the buyer has to play the averages, knowing only that >some cars are lemons but not whether the particular car he's buying >is. Buyers will pay only a price that reflects the average frequency >of lemons in the used-car crop. That average is a high price for a >lemon but understates the worth of the better cars offered on the >market. The owners of the better cars are reluctant to sell at a >price that makes allowance for the lemons that other people are >selling; so the better cars appear less frequently on the market and >the average frequency of lemons increases. As customers learn this, >they make a greater allowance for lemons in the price they're willing >to pay. The cars of average quality in the previous market are now >undervalued and their owners less willing to sell them. The >percentage frequency of lemons continues to rise. In the end, the >market may disappear, although institutional arrangements like >guarantees, or the certification of cars by dealers who exploit a >reputation for good cars, may keep the used-car market alive. Akerlof has a point, and the market may be squeezed out if this effect is strong enough. But there is a countervailing force, which in the case of used cars keeps the market alive. This is the fact that the value of an object is different for different people. Thus there is a point where the seller gets more for the car than it is worth to her, and the buyer pays less than the expected value to him, even taking the chance of buying a lemon into account. Certainly the market is less efficient than it would be if both sides had equal access to information. But the conclusion that the market will disappear is, in general, too strong. Frank Adams ihpn4!philabs!pwa-b!mmintl!franka Multimate International 52 Oakland Ave North E. Hartford, CT 06108