Quality, Choice, and the Economics of Concealment: The Marketing of Lemons

Authors

  • ROBERT R. KERTON,

    1. Robert R. Kerton is Professor and Richard W. Bodell is Associate Professor, Department of Economics, University of Waterloo, Waterloo, ON, Canada.
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  • RICHARD W. BODELL

    1. Robert R. Kerton is Professor and Richard W. Bodell is Associate Professor, Department of Economics, University of Waterloo, Waterloo, ON, Canada.
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  • The authors are especially grateful to Keith Bryant and E. Scott Maynes for valuable critiques. Early versions of the research were presented at Cornell University, at the Annual Conference of the American Council on Consumer Interests, and at the University of Queens land. We thank participants for helpful suggestions. We also express sincere thanks to diligent reviewers for extensive suggestions which have significantly improved the paper. None of these is responsible for any remaining defect, visible or concealed.

Abstract

The quantity of hazardous or ineffective products on national and international markets is higher than can be explained by current theory. Research has shown that “lemons” can indeed occur and it has specified roles for (a) potential future purchases and (b) seller reputation. This paper explores incentives facing sellers of goods containing one or more negative characteristics. The economics of concealment provides the conditions under which some sellers use resources to interfere with quality signals. This allows, at the extreme, a class of product which is a “pure lemon” in that its very existence would not be justified if consumers were fully informed. The paper identifies important variables which have direct policy implications for regulation and for consumer welfare.

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