The situation is called asymmetric information,that is to say, the parties concerned possess different information about a transaction. The very fact that a used car is for sale indicates that it may be a "lemon"-why sell a reliable car?because there exists quality uncertainty and lemons market for used cars
The situation is called asymmetric information, that is to say, the parties concerned possess different information about a transaction. The very fact that a used car is for sale indicates that it may be a “lemon” –why sell a reliable car? because there exists quality uncertainty and lemons market for used cars
Unfortunately,consumers cannot easily determine the quality of a used car until after they purchase it. Buyers'lack of information prevents this mutually beneficial trade from occurring,thus resulting in market failure(市场失灵). As a result,the price of used cars falls,and high-quality cars are driven out of the market
◼ Unfortunately, consumers cannot easily determine the quality of a used car until after they purchase it. Buyers’ lack of information prevents this mutually beneficial trade from occurring, thus resulting in market failure(市场失灵). ◼ As a result, the price of used cars falls, and high-quality cars are driven out of the market
2 Adverse selection(逆向选择) The situation is called adverse selection. For example,because they cannot distinguish between high-risk and low-risk individuals,if insurance companies must charge a single premium,more high-risk individuals will insure, making it unprofitable to sell insurance. How to alleviate adverse selection problem?
2 Adverse selection（逆向选择） ◼ The situation is called adverse selection. For example, because they cannot distinguish between high-risk and low-risk individuals, if insurance companies must charge a single premium, more high-risk individuals will insure, making it unprofitable to sell insurance. ◼ How to alleviate adverse selection problem?
3 Market signaling(市场信息传递) Maybe the answer is guarantees and warranties. Guarantees and warranties effectively signal product quality because an extensive warranty is more costly for the producer of a low-quality item than for the producer of a high-quality item.The low-quality item is more likely to require servicing for free under the warranty
3 Market signaling (市场信息传递） ◼ Maybe the answer is guarantees and warranties. Guarantees and warranties effectively signal product quality because an extensive warranty is more costly for the producer of a low-quality item than for the producer of a high-quality item. The low-quality item is more likely to require servicing for free under the warranty
As a result,in their own self-interest,producers of low-quality items will not offer extensive warranties. Thus consumers can correctly view an extensive warranty as a signal of high quality,and they will pay more for the warranted products. The situation is called market signaling
◼ As a result, in their own self-interest, producers of low-quality items will not offer extensive warranties. Thus consumers can correctly view an extensive warranty as a signal of high quality, and they will pay more for the warranted products. ◼ The situation is called market signaling