Remember that time when you bought new shoes online? When it looked perfect on the model, and you could already imagine yourself showing it off to all your friends? The website seemed a bit shady, but hey; they offered an amazing deal! Well, raise your hand if that perfect image was crushed as soon as you got them. I assume that your hand is in the air right now and I have to tell you, mine is as well. Unfortunately, it is a problem most of us has faced once or twice. It is even so common, that economist George Akerlof wrote a paper on it entitled “The Market for Lemons” back in 1970. In his paper, Akerhof (1970) described the lemon problem as a problem that occurs because of asymmetry of information in a market. It goes as followed: When a buyer cannot observe the quality of the product, sellers have the advantage of being able to lower the quality of the product. As a result, the buyer risks to buy a product that is not of the quality he expects (‘a lemon’). Due to this risk, the amount that the customer is willing to pay reduces, which will lead to a decline in the price of the product as well. Consequently, sellers are forced to lower the quality even further until eventually, the lemons of the lowest quality are being sold. Talk about adverse selection!
However, this problem of the lemons goes further than just a pair of shoes: It can even be applied to the media market. The customers in this market are facing the task of assessing whether the news is true or not. Every day, we are bombarded with information, which makes it difficult to find the truth. According to a research conducted by Shleifer and Mullainthan (2005), only someone with access to all news sources is able to get an unbiased perspective. However, no-one has time to read all news sources to form such a perspective. As a result, the quality and accuracy of information is often not assed, which can eventually steer the media market towards a market for lemons (Shleifer & Mullainthan, 2005). This has consequences for professional media outlets as well. It would seem likely that the quality of the news would improve due to more competition from independent bloggers on the Internet. However, this competition is not enough to ensure that the news is accurate. In fact, it sometimes even reinforces reader biases! According to Shleifer and Mullainthan (2005), competition results in lowers prices, but often select information according to reader biases. This way, they are able to please their readers, which will lead to a broader audience and thus profit.
Even though media outlets seem to have an advantage regarding the problem of the lemons, falsehood in media sources often create public mistrust of these outlets (Shleifer & Mullainthan, 2005). Therefore, I think it is important to identify false information and those who produced this. By exposing this, we can make sure that good quality information will not crowd out the bad quality information. However, we do have to take into account that media consumers identify bad quality information themselves already. They are active in deciding which media outlet they want to use, and do not passively take everything the media feeds them for granted (Blumler & Katz, 1974, as cited by Livingstone, 2000). Thus, they are searching for information themselves. From a marketing perspective, I also think that although Akerhof makes a relevant point with his theory on the market of lemons, it is questionable to which extent it can be applied in practice. Consumers search for trust in the companies they buy their products from and thus actively for information. Companies also actively built a certain image to grantee the quality of their products.
Even though I took a risk in buying the previously mentioned shoes, it does not happen often that I buy shoes through a website I do not trust. We can thus see that although there are situations in which information asymmetry occurs, consumers themselves deal with the problem as well. Eventually, we might be even able to prevent ourselves from tasting that very sour lemon.
References
Akerlof, G. (1995). The market for “lemons”: Quality uncertainty and the market mechanism. In Essential Readings in Economics (pp. 175-188). Macmillan Education UK.
Livingstone, Sonia (2000) Television and the active audience. Formations: 21st century media studies. (pp. 175-195) Manchester University Press, Manchester, UK
Mullainathan, S., & Shleifer, A. (2005). The market for news. The American Economic Review, 95(4), 1031-1053.
