When A Lemon Market Emerges?

Abstract

The ‘Market for lemons’ has been a focus of heated interest in economics and related fields since the seminal work in 1970 by Akerlof. Since the unique equilibrium of the total market failure identified by Akerlof was the result of the specific assumptions on the unitility functions of traders and quality distribution of goods, other possibilities of the market with information asymmetries have been studied. Proliferation of Internet and e-Commerce has brought diverse marketplaces with more information asymmetry. Markets have devised workaround mechanisms to cope with the “lemon” problem by basically manipulating the level of information asymmetry. Then, according to prior studies such as Wolinsky (1983), different equilibria (a competitive market, a lemon market or in between) can arise because of the degree of information asymmetry in a market and interaction between the market and its participants. It will also be possible that such manipulation makes one equilibrium transition to another one. This could be a concern of grave importance to market makers. Hence, we are interested in dynamics and emergence of markets with information asysmmetry. This study present a stylish analytical model focusing on the possibility of different equilibria and transition among them. An agent-based modeling approach is employed to extend our findings in a more realistic setting.