DecisionPlay converts strategic situations into game theory models. Describe any negotiation, conflict, or difficult decision and the engine extracts players, strategies, and payoffs to identify Nash equilibria and key leverage points.
Free and browser-based. No account required.
economics · 1970
George Akerlof used the used-car lot to show how hidden quality can make honest trade unravel, and why the cure is a signal that liars cannot afford to send.
Facts drawn from the published economics literature and prize records; model results are labeled as modeled.
In August 1970 the Quarterly Journal of Economics published George Akerlof's paper "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," a short argument that several journals had previously rejected as trivial or wrong. It became one of the most cited papers in economics, and it earned Akerlof a share of the Nobel Memorial Prize in Economic Sciences in 2001, alongside Michael Spence and Joseph Stiglitz, for the analysis of markets with asymmetric information.
The argument runs on a used-car lot. Sellers know whether their car is a peach or a lemon; buyers cannot tell them apart, so a rational buyer offers a price reflecting the average quality on the market [MODELED]. At that pooled price, owners of above-average cars would be selling at a loss relative to their car's true worth, so they withdraw, which lowers the average quality on offer, which lowers the price buyers will pay, and the spiral can continue until little or nothing of quality trades at all [MODELED]. Distrust, in this market, is not a moral failure. It is the equilibrium.