Comment by godelski
6 months ago
> As a little thought exercise, you can take two minutes and come up with some ways businesses can 'fix' markets for lemons and make a profit in the meantime. How many can you find? How many can you find already implemented somewhere?
This sounds exactly like what causes lemon markets in the first place. Subtle things matter and if you don't pay attention to them (or outright reject them) then that ends up with the lemon market situation.
Btw, lemon markets aren't actually good for anyone. They are suboptimal for businesses too. They still make money but they make less money than they would were it a market of peaches.
Let me give you an example: reputation can solve the 'market for lemons'.
If you build a reputation for honest dealing and high quality, then people can trust that you don't sell them lemons (ie bad used cars in the original example). This reputation is valuable, so (most) companies will try to protect it.
And that's exactly what's happening with some used car dealers.
You know, the lemon market also applies to new cars, right? And it still happens with name brands. Go read the paper, it accounts for those things.
I mean it got a Nobel prize. You really think they didn't think things through?
The paper explicitly has to exclude reputation as a mechanism.
They did think this through, but that doesn't mean reputation doesn't work in the real world.
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