The Market for Lemons

10 mins read

Secondary markets (Second-hand markets) have been agreed upon in the world economy. It has not grown in production and demand in the world. Such pleasantness and application have grown in the market and have solved this problem. Assuming you have $10,000 in your pocket versus America, you will have $5,000 left for your home and necessities. An American citizen is taken to an old used car and when you notice this vehicle in your dream vehicle. The price of this vehicle, which is sold as a primary product as a “zero product”, is determined as $ 5,000 at a store of $ 12,500. Here are someone else’s leftovers as your dream (need) and everything works great, but does it work? Let’s answer this question in our article with a study by Nobel Prize-winning Economist (not to forget Michael Spence and Joseph E. Stiglitz) George Akerlof. Introducing “Lemon Markets”;

George Akerlof

George Akerlof is an American Economist who came in 1940. People relate it to “Lemons”, one of our markets today. In the “Market “Lemons”: Uncertainty and Market Mechanism Quality article, Akerlof shows that they are chosen for their quality in the sectors, in the knowledge of their secondary market, and in the determinations regarding the quality to be found in raising hands in the markets. By the way, we should state that Lemon Markets are not the real lemon markets as it is thought, “The term Lemon in the United States of America is a term used for vehicles in poor condition. Akerlof should be very well mentioned. Today we will dwell on it to move.

1- Information Asymmetry

2- Lemon Markets for Vehicles

3- Lemon Markets for Insurance Companies

1- Information Asymmetry

Knowledge is a notion of intimacy that is/continues in an opinion about the probability (or vice versa) that everyone from all over the world in the rebel possesses. It can be reached that one of the people with information asymmetry can benefit from a selection of security or opportunities that can be won. At this economic level, a market is classified as a hairdresser and is uneasy. Our estimation of this is at best an estimation. You have bought a few bucks of stock from a bank-oriented company whose stock in A Metal company is bought for 3$ in the stock market day by day and the price goes over. Let’s say the stories about their children in the investment news and economic news and the stories to be talked about on television start to increase their reputation and close the house. By joining the trend and popularity with this whitepaper, Metal analysis stock was in demand and its face value closed at $6 at the end of the day. Here is the usage.

2- Lemon Markets for Vehicles

According to Akerlof, there is a decline in information asymmetry in the hand world, where bad quality drives out good in good quality in the real world (Gresham Law is the choice of the coming weeks; “Bad money drives good second”). So how will this truth come out, let’s explain?

Since Akerlof allegedly owns children when he owns the most extensive product of the property he owns while in his vehicles, it is time-consuming (this should be consulted with specialized agencies or appraisals).

Suppose there are 10 cars on a road;

Very Bad – Bad – Average – Good – Perfect

In two markets of each quality and combined with low prices at an average price;

Very Bad (Lemon)= $2,500

Bad = $3,500

Average = $4,250

Good = $5,000

Perfect = $6,500

This average brokerage price is $4,350. Let’s say we like the +/- $1,000 flexing of prices with an average standard deviation. In this case, they will make the market and give up trading, as their stretch participation will remain above “good” expectations.

The new road remains 8 vehicles and the average vehicle price drops to $3812. This time, important values ​​for yawn participation in terms of “Average” transportation They leave the market because they will be under the throttle and this situation continues until the last scenario where only “Lemon” vehicles will remain.

Thus, “Lemon” vehicles expel “Good” vehicles from the market and a very disadvantageous trade cycle begins for the consumer (buyer). For this reason, what needs to be done is to tolerate the information asymmetry as much as possible by the necessary organizations and experts. In this way, the buyer will have at least as much knowledge as the seller and will be freed from victimization.

3- Lemon Markets for Insurance Companies

The example of insurance companies, on the other hand, is an example that deals with the superiority of the buyer over the seller by describing a completely opposite relationship. Information asymmetry works the other way around this time, because the market and the industry are in a completely different position. Insurance companies insure their goods and services by insuring them against risky situations, individually and institutionally. If the risky situation does not occur, it earns premiums and profits with the regular payments it receives. The most important customer identification criterion for insurance companies is the measurement of “Risk” conditions. At this point, an information asymmetry occurs because a person who comes to the insurance company will have more information about his own risk level than the Insurance Company. This asymmetry turns into an advantage in favor of the high-risk customer, and the risky customer gradually pushes the low-level customers out of the market. The mathematical explanation for this is as follows:

Very Risky – Risky – Medium Risk – Low Risk

Let’s assume that there are two people from each customer group and determine the number of people/institutions to be insured as “8”;

Very Risky = $10,000

Risky= $7,500

Medium Risk = $5,000

Low Risk = $2,500

Since the “Very Risky” customer group will be willing to pay higher premiums due to their high risk, the prices will increase in proportion to the risk. The average Insurance premium will be $6,250 per year, so again assuming with an average standard deviation that prices are entitled to +/- $1,000 stretch, the Low-Risk client will abandon the insurance and leave the market since the lowest premium will be $5,250. Thus, with each new move, the risk of the customer portfolio will increase exponentially, and insurance companies will be in a difficult situation.


Akerlof used a great example when examining secondary markets, which has carried over from 1970 to the present and has become a part of market disruptions. Although we economists write and draw the plans for a smooth and perfect exchange, in some cases, problems may arise with other fundamental flaws, especially information asymmetry. Secondary markets appear as the markets where these defects are experienced the most, and which contain the possibilities even if they are not experienced. Although the idea of ​​people selling the products, they don’t need for less than the firsthand price and combining them with the consumers who need them seems like the seventh wonder of the world, it doesn’t seem like a great situation that many consumers are frustrated due to the asymmetric information (The loudspeaker I bought from the flea market exploded on the third day. as.). For this reason, eliminating these information asymmetries by listening to Akerlof’s views will ensure both the fluidity and reliability of this market (secondary markets) and make secondary markets at least as effective as primary markets. Remember, we are overpopulating, and we have the obligation to use our resources at optimum efficiency. A product produced for this reason should be used as much as possible (please do not try this advice on products such as napkins or toothbrushes!) and a way of saving in terms of resources should be sought. Akerlof and I wish you sour days! With love,

Ozan Kireççi

Istanbul University, Departmant of Economics, Interested Economics and Political Science.