If you are here to read anything about the skyrocketing lemon prices in India, then sorry to disappoint you but this isn’t about that. But you can stay and read something even more interesting. Have you ever been to Chor Bazar? Even after knowing that the things in Chor Bazar aren’t the best quality, we tend to buy them…so, isn’t it obvious that we can possibly buy cheap quality things unknowingly? Or maybe I must say that we are deliberately kept in the shadows! It’s like you are watching a dance competition blindfolded, you can only listen to the music and now you can do nothing but decide the winner as the one who danced to a better song.

I would like you all to focus on two terms from the above analogy. First, blindfolded which refers to a consumer in the market with lack of information, and the second refers to a situation where your personal best might not be the real best as you are making decisions with a shortcoming.

Same thing happens in normal markets as well, it’s just that you are not wearing the blindfolds. Let me explain! So economics has this concept called asymmetric information, it simply means that buyers and sellers do not have the same amount of information needed to make an informed decision about a transaction. Due to the asymmetric information to the buyer, he/she chooses to buy the products with cheap quality as he/she is not willing to spend anything above his/her average price. In this situation, the goods with superior quality and value are vanished from the market, and inferior quality goods (aka lemons) take their place.

Indian car market is flooded with applications like Car Dekho, OLX, Cashify, Quikr, and much more. This phenomenon can be perfectly explained with the example of this car market. The model that appear on the app may look perfectly fine but the reality is not always the same given that buyers have asymmetric information about that model. The seller or holder of a product or service is usually aware of its value or, at the very least, whether it is of superior or inferior quality. Potential purchasers, on the other hand, are usually unaware of this fact and must rely only on the seller’s information.

Take for example, the sellers of high-quality products, knowing they will only receive an average price, may exit the market, as they feel their products are undervalued. As high-quality goods exit, the market is increasingly populated with low-quality goods, further lowering the average quality and price. In extreme cases, the market can collapse entirely as buyers and sellers fail to find a mutually agreeable price, driving out all quality-conscious participants. Car market is not the only example, lemon markets can emerge in many areas such as electronics, health insurance and real estate, affecting a diverse variety of economic sectors and regulations.

Let’s take an example of health insurance! Individuals with high health risks (lemons) are more likely to seek coverage, resulting in greater costs for insurers. Insurers then boost premiums, driving healthy individuals (peaches) out of the market, intensifying adverse selection, and perhaps leading to an insurance market collapse.

Financial markets can also display lemon market characteristics, particularly during economic downturns or crises. Investors who are unsure about the genuine worth of assets may withdraw from the market. This can cause liquidity crises and asset price falls. Firms in labor markets may struggle to discern between high- and low-productivity workers. If remuneration levels match average productivity, high-quality individuals may leave for higher-paying employment or establish their enterprises, lowering firms’ overall productivity.

A solution to this is simple, Dot your I’s and cross your T’s!