Knowing thy peaches and lemons

The second-hand car market has some insights about life

MUMBAI: It's all coming to an end now. I am leaving this city. I was born and brought up here. This city has given me so much and has taken away so much. This is the city where I experienced the first flash of love and the first pain of heartbreak. I have stayed here for too long, and now it's time to move on. And as I write this, Bob Dylan, singing with a nasal twang, loops in my mind.  "But goodbye's too good a word, gal, so I'll just say fare thee well."

But I have a slight problem. Nobody is willing to give me the right price for the beauty I bought six months back. And before you guys start having any second thoughts, it's my car I am talking about. Well, people have been quoting ridiculously low prices. For one, it's so difficult to part with it and, two, I need money.

"But why are things like this?" I wonder. There must be a reason. I found the answer on the Internet — in George Akerlof's research paper, The Market for Lemons, which he wrote in 1970. In this paper, Akerlof has analysed the problem people face in selling second-hand cars or what he calls used cars. As I start reading, I get some hope. If a world famous economist can write a paper on it, then, for sure, I must not be the only one facing the problem.

In this paper, Akerlof has divided the second-hand car market into two types of cars, peaches and lemons. Peaches are cars, like mine, which are in a good shape. And lemons are cars which are not in a good shape. Now, since I am the seller, it doesn't take rocket science to figure out whether my car is a peach or a lemon. But the guy buying it obviously doesn't know. Economists refer to this as inside information.

This ensures that the second-hand car market does not really work well. As Tim Harford points out in his book, The Undercover Economist, "Anyone who has ever tried to buy a second-hand car will appreciate that Akerlof was on to something. The market doesn't work nearly as well as it should; second-hand cards tend to be cheap and of poor quality. Sellers with good cars want to hold out for a good price, but because they cannot prove that a good car is really a peach, they cannot get that price and prefer to keep the car for themselves. You might expect that the sellers would benefit from inside information, but in fact there are no winners: smart buyers simply don't show up to play a rigged game".

Harford further points out, "Akerlof showed that none of those value-creating trades happen because the buyers will not buy without proof, and the sellers cannot offer proof".

In fact, because of this very reason, people prefer to buy a new car, rather than a second-hand car. As George Akerlof points out in an essay, Writing the The Market for Lemons: A Personal and Interpretive Essay, "I knew that a major reason as to why people preferred to purchase new cars rather than used cars was their suspicion of the motives of the sellers of used cars".

And so, there I am stuck with my beauty. Buyers won't offer what I think is the right price and I won't sell it for anything less. Guess I'll keep it. Maybe there is a karmic connection and this is God's way of ensuring that it continues.

(The example is hypothetical)