Lemon Problem

This week we discussed the concept of the Lemon Problem in respect to the used car market. This problem is that since it is not possible to distinguish between reliable cars and lemons, there are too many lemons and too few reliable cars. The seller has no incentive to be truthful and they also have little incentive to care for their cars.

I would argue that due to an increase in the awareness of the average consumer that the Lemon Problem is more common with private sellers rather than dealerships. There are a multitude of websites and networking communities that a consumer can rate a dealership on which is an increased motivation for the dealership to provide it's customers with quality vehicles. If they routinely sell lemons then they will not receive referral based business and they will also get a bad reputation among consumers. Before the popularity of the internet this was not as much of a concern but now there are simply too many available options for consumers for a dealership to overcome a bad reputation.

A private seller does not have this limitation in that they will not be reviewed with the same publicity. They are typically selling a vehicle once every few years so the Lemon Problem certainly applies to them.