Ecommerce, Marketplaces, and A Market for Lemons

[mandy]

The basic premise of the Market for Lemons concept is that in markets where information asymmetry exists, a "Market for Lemons" can ultimately develop in the absence of an effective signaling mechanism.  It is important to note that in eCommerce, this is completely natural and to be expected given the following facts.  Buyers and sellers are typically thousands of miles apart.  Often and especially with small and medium-sized retailers, the buyers and sellers don't know each other (SMBs don't have recognizeable brands) and they haven't previously transacted together.  Although it is easy to review feedback and merchant ratings, it is almost impossible (certainly it is extremely difficult and expensive at the least) for buyers to perform adequate due diligence before the transaction (Is the merchant legitimate, professional, trustworthy and reliable?  Is the merchant financially stable and going to stay in business?  Is the merchant licensed?  Is the merchant selling counterfeit products?  etc...).  The buyer is also at a structural disadvantage in eCommerce transactions because the buyers pays for the item before ever seeing or receiving the real product.  I could go on and on, but you get the point.  The buyer is at an information disadvantage to the merchant when transacting online.  The ecommerce buyer suffers from information asymmetry relative to the seller...

full article: http://blog.swoda.com/blog/2006/09/what_is_a_marke.html

[maryrussel]

Interesting. Most of us would argue that this is what is happening already on eBay.

As quality is undistinguishable beforehand by the buyer (due to the asymmetry of information), incentives exist for the seller to pass off a low-quality good as a higher-quality one.

The buyer, however, takes this incentive into consideration, and takes the quality of the good to be uncertain. Only the average quality of the good will be considered, which in turn will have the side effect that goods that are above average in terms of quality will be driven out of the market.