Economics for Dummies by Flynn Sean Masaki;

Author:Flynn, Sean Masaki; [Flynn, Sean Masaki]
Language: eng
Format: epub
Publisher: John Wiley & Sons, Incorporated
Published: 2023-09-24T00:00:00+00:00

BUILDING A REPUTATION

Another way to solve the lemons problem is to reassure buyers by setting up a market in such a way that sellers can build a reputation for honesty and fair dealing. That’s why most good used cars are sold through used car dealers rather than directly between individuals.

Compare a used car dealership with an individual selling their used car online. Who has more of an incentive to tell the truth about car quality? The used car dealer makes their living selling used cars, so if they overcharge one customer by pretending a bad car is good, they get in trouble. When that car starts to break down, the buyer becomes angry and uses social media to tell all their friends that the dealer cheated them. And that loss of reputation cuts into the dealer’s future sales. In fact, the dealer will quickly go bankrupt if they develop a reputation for lying.

By contrast, an individual selling their used car doesn’t have to worry about developing a reputation for lying because their main source of income isn’t selling cars. If they cheat you and you get mad and tell all your friends, it won’t affect them much at all. An individual has much more of an incentive to lie than does the used car dealer, who has to worry about their reputation. As a result, many good used cars are sold through used car dealers. (But even at used car dealers, people still need some reassurance, which is why most used car dealers also offer warranties.)

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