The Lemon Market refers to a market with asymmetric information, that is, in the market, the seller of the product has more information about the quality of the product than the buyer.

n extreme cases, the market stops shrinking and does not exist. This is the adverse selection in information economics. The lemon market effect means that in the case of information asymmetry, good products are often eliminated, and inferior products will gradually occupy the market, thereby replacing good products, resulting in inferior products in the market.

To put it simply, in the market, inferior products, due to information asymmetry, replace good products thus, thus occupying the market.

Reasons for the emergence of lemon market:

Why can such a market exist for such a long time? The reason for the existence of the lemon market is that the transaction party does not know the real value of the commodity, and can only judge the average quality by the average price in the market. Since it is difficult to distinguish the quality of the commodity; it is only willing to pay the average price.

Since there are good and bad commodities, for the average price, those who provide good commodities will naturally suffer, and those who provide bad commodities will benefit. So good products will gradually withdraw from the market. As the average quality falls, the average price also falls, and commodities whose real value is above the average price are gradually withdrawn from the market. In the end, only bad commodities remain.

In this case, consumers will think that the products on the market are all bad. Even if they are faced with a good product with a higher price, they will be sceptical. In order to avoid being deceived, they will finally choose a bad product.

For example, in the second-hand car market, sellers have more information than the buyers, and the information between the two is asymmetric. Buyers certainly won't believe what sellers say. The only way for buyers is to drive down prices to avoid risk losses caused by information asymmetry.

Buyers' low prices also make sellers reluctant to provide high-quality products, so low-quality products flood the market, and high-quality products are driven out of the market. Finally the second-hand car market shrinks.

What are the dangers of lemon market?

This kind of information asymmetry, in addition to the problem of shrinking the market, will also lead to a moral crisis, and the unscrupulous merchants would take advantage of this advantage to defraud or fool buyers. For example, in the second-hand market, green food trade market, insurance market, housing and other markets, brands with more information advantages than the customers would deceive the customers. In the end, customers will lose confidence in the market, which will trigger the "lemon market" across the entire industry, and eventually lead to the bankruptcy of the trust of consumers, the shrinking of the market, and the destruction of industry rules, which would seriously damage the development of companies.

（Writer：Zoolu）