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07_BackgroundReading_EconomicsFocusTheLemonDilemma

07_BackgroundReading_EconomicsFocusTheLemonDilemma -...

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World politics Business & finance Economics Science & technology Culture Blogs Debate & discuss Multimedia Print edition All Economics Economics by invitation Markets & data Oct 11th 2001 | from the print edition Economics focus The lemon dilemma This year's Nobel prize for economics honours work inspired by a simple observation about used cars TODAY'S global economy is a colourful landscape. Brands are ubiquitous, sprouting from billboards, television and magazine advertisements that relentlessly tout the virtues of products. Humans themselves are not immune: American business gurus advise aspiring executives to style themselves as a product, “Brand You”. Nowadays, everything seems to be a sales pitch. But brands do help to make the world easier to navigate. A Coke or a Big Mac, say, is almost the same everywhere in the world. The customer knows the quality of a product by its brand. To understand why brands are so valuable an economic innovation—despite being pilloried by the anti-globalisation lobby—you need only imagine what happens when sellers offer a product whose quality a buyer cannot easily judge. Take the frustratingly familiar problem of buying a used car. Assume that used cars come in two types: those that are in good repair, and duds (or “lemons” as Americans and most economists call them). Suppose further that used-car shoppers would be prepared to pay $20,000 for a good one and $10,000 for a lemon. As for the sellers, lemon-owners require $8,000 to part with their old banger, while the one-owner, careful-driver old lady with the well-maintained estate won't part with hers for less than $17,000. If buyers had the information to tell wheat from chaff, they
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