According to the lemon laws recently discussed in class, asymmetrical information can create a market where the quality of the good becomes uncertain. In lecture we discussed this effect in the used car market. The seller has an advantage to offer low-quality car (lemon) to the less-informed buyer so only the average quality of the car is considered and any car that has above average quality standards will be driven out of the market. The lemon market can also be applied to world of eBay where counterfeit products and false advertisements are a plenty.

An example of such an incidence is the selling of “hacked” MP3 players that advertise greater memory capacity than actually available. The seller who is aware of this is able to sell the product at a lower price. Buyers of this hacked product only discover this insufficient capacity when files are copied to the actual capacity of the player; this could take weeks or even months to reach. Because, often times, this memory capacity is reached long after feedbacks and ratings have been posted, feedback ratings will not reflect the true quality of the good and consumers will continue to purchase this cheaper low-quality good. Eventually, the hacked players will drive the high-quality un-hacked player good out of market.

Another example is the rising counterfeit sales of Tiffany and Co. jewelry. In a test that was performed by the famous jeweler itself, it was found that ¾ of eBay’s Tiffany and Co. jewelry was fake. The merchants who advertise this product to be “authentic” are attracting less-informed buyers with their lower prices thus driving the authentic goods out of market.

One action that has taken to prevent such lemon markets is the policing of products on the site. Ebay has been monitoring the site and agreed to remove 19,000 auctions upon Tiffany’s request, however with the number of auctions increasing by the thousands, policing the entire site is nearly impossible. Therefore, the lemon market will continue to persist so long as the presence of asymmetric information exists.

http://www.msnbc.msn.com/id/6030048/
http://en.wikipedia.org/wiki/The_Market_for_Lemons