Comparing the “Market for Lemons” to the UK Used Car Market
In the United Kingdom, there is a growing issue of used cars being listed for sale without all the proper information needed to make a purchase. Cars that are written off by insurance companies must be reported to the UK’s version of the DMV, the Driver and Vehicle Licensing Agency (DVLA). These cars then must be inspected. 97% of the cars are inspected through the Motor Insurance Anti Fraud & Theft Register (MIAFTR) and 3% are checked via other methods. This data is sent to the DVLA. From here, there are two big companies involved in checking vehicle history for potential buyers: AutoCheck and HPI. These companies refer only to MIAFTR for their data, meaning that they do not account for 3% of cars’ inspections. This small percentage is equivalent to 100,000 cars annually. When potential buyers go to AutoCheck or HPI to see data on a car, they begin to face a dilemma associated with the concept of the “Market for Lemons.” In this scenario, the concept applies as follows: all of the cars might look fine on the outside, but some of them have interiors that are subpar and even dangerous. Some cars are unknowingly subpar to buyers, and sites like AutoCheck and HPI don’t disclaim every car’s previous history. Knowing this, consumers will want to pay a lower price for all cars as sellers increase the price of lower quality cars. Over time, the better cars will get driven out of the market and buyers will pay more for the remaining subpar cars.
The “Market for Lemons” is a paper written by George Akerlof in 1970 about how information asymmetry can cause a market to lose its higher priced items and cause people to overpay for lower priced items. When buyers are unaware of what they are buying, they don’t really know what quality they are paying for and are more inclined to pay less for top quality and more for low quality. In this scenario, there is a massive amount of used cars that have unknown qualities to the buyer. The uncertainty is allowing sellers to increase the price of lower quality cars. In time, people with better used cars will likely pull them out of the market. By not including all potential inspections, places like AutoCheck and HPI are taking on the uncertainty, and this uncertainty will remain until they start accounting for the remaining checks. How can someone differentiate between a car with a missing inspection that is fine, versus a car with a missing inspection that should never be driven? The uncertainty involved with a vehicles’ past history can be extremely concerning, and the “Market for Lemons” could cause most people to have to buy subpar vehicles, while people looking to sell high quality vehicles will be stuck with their cars. Ultimately, what matters most is that buyers will overpay for cars that could end up being extremely dangerous and they won’t even know.
Article: https://ftalphaville.ft.com/2019/03/20/1553063452000/The-UK-s-used-car-write-off-conundrum/