Quality, Choice, and the Economics of Concealment: The Marketing of Lemons

The quantity of hazardous or ineffective products on national and international markets is higher than can be explained by current theory. Research has shown that “lemons” can indeed occur and it has specified roles for (a) potential future purchases and (b) seller reputation. This paper explores incentives facing sellers of goods containing one or more negative characteristics. The economics of concealment provides the conditions under which some sellers use resources to interfere with quality signals. This allows, at the extreme, a class of product which is a “pure lemon” in that its very existence would not be justified if consumers were fully informed. The paper identifies important variables which have direct policy implications for regulation and for consumer welfare.