Informed Buyers in the Market for Lemons
Kyungmin Kim’s paper “Information about Sellers’ Past Behavior in the Market for Lemons” examines how a sellers’ past behavior influences the market for lemons theory. He argues that in a market for lemons, i.e. used cars, the buyer faces a risk when he decides what price he is willing to buy the car for. If he proposes too low a price, the seller my reject the offer but if he offers too high a price, he might overpay for a “lemon.” Kim suggests that in this scenario the buyer should consider the sellers past behavior to make a more informed decision regarding what price to buy the car for. If the seller rejected a relatively high price in the past, it is more likely that the car has a higher value. However many problems come into play when analyzing a seller’s behavior. A seller’s records might not be readily available or the buyer might have to interpret the records. The seller also might be motivated to reject prices if they know it will improve their credibility. Regardless of the true value of the car, a seller could reject a reasonable price in order to encourage future buyers to buy the car for a higher price.
In his paper, Kim explores how market performance and allowing buyers access to information relate to each other. There are two contradictory arguments on how informed buyers affects market efficiencies. Information on sellers past behavior enables buyers to make more accurate predictions on the value on the car and how much they should buy it. However, if there are both informed and uninformed buyers in the used car market, the informed markets can signal their types, decreasing the efficiency of the market.
Kim K. 2012. Information about Sellers’ Past Behavior in the Market for Lemons.