Blackwell Reference Online

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In information theory, a “lemons market” is a market in which the degree of asymmetric information between buyers and sellers is very high, and, in the extreme, may result in market failure. Akerlof (1970) provided an intuitive and logical explanation of this theoretical result by reference to a used car market. In a used car market, there may be cars that are of good quality and those that are “lemons.” Since sellers are generally better informed than buyers regarding the quality of the car and buyers are not easily able to discern car quality, buyers will be unwilling to pay the “good car” price for a car of uncertain quality, so they value a car at the average price. In the extreme, owners of good cars will be unwilling to sell their cars at the prevailing price and, ultimately, the only cars in the market will be those that no one wants and the market will fail. The solution to this problem requires that market participants act to reduce the level of information asymmetry. For example, buyers might invest in additional information by hiring experts or gaining expertise themselves. Sellers may attempt to better convey information, although they will have to bear some costs to make their claims of value believable to potential buyers ( see signaling ). The logic and intuition used in the used car example has been extended to several other markets that exhibit imperfections ... log in or subscribe to read full text