The Market for Lemons: Buyer-Seller Information Imbalance

Buyers and sellers often do not have the same information in transactions, particularly in markets like the used car industry. Asymmetric information leads to sellers knowing more about the product's quality than buyers. Akerloff's paper 'The Market for Lemons' explains that when sellers possess more information, buyers reduce the price they're willing to pay, causing a downward spiral in pricing. This cycle results in only low-quality products being exchanged and ultimately leads to market collapse. Trust mechanisms, like third-party inspections, can restore buyer confidence and mitigate the effects of information imbalances in such markets.