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Classroom Games: A Market for Lemons

Author

Listed:
  • Charles A. Holt
  • Roger Sherman

Abstract

The incentives that arise in markets with asymmetric information are illustrated in the classroom exercise presented here. Student sellers choose both a quality 'grade' and a price for their products. Initially, both prices and grades for all sellers are posted, and buyers select from these offerings. In this full-information setup, the market prices and grades quickly reach efficient levels that maximize total surplus. Next, although sellers continue to choose grades and prices, only prices (not grades) are posted for buyers to see when they shop. The grades and prices then fall to inefficiently low levels. The observed market outcomes in this exercise can stimulate useful discussion of asymmetric information, market failure, and remedies such as quality standards and warranties.

Suggested Citation

  • Charles A. Holt & Roger Sherman, 1999. "Classroom Games: A Market for Lemons," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 205-214, Winter.
  • Handle: RePEc:aea:jecper:v:13:y:1999:i:1:p:205-214
    Note: DOI: 10.1257/jep.13.1.205
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.13.1.205
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    References listed on IDEAS

    as
    1. DeJong, Douglas V & Forsythe, Robert & Lundholm, Russell J, 1985. " Ripoffs, Lemons, and Reputation Formation in Agency Relationships: A Laboratory Market Study," Journal of Finance, American Finance Association, vol. 40(3), pages 809-820, July.
    2. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    3. Charles A. Holt, 1996. "Classroom Games: Trading in a Pit Market," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 193-203, Winter.
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    Citations

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    Cited by:

    1. Michelle S. Goeree & Jeroen Hinloopen, 2008. "Cooperation in the Classroom: Experimenting with R&D Cooperatives," The Journal of Economic Education, Taylor & Francis Journals, vol. 39(4), pages 357-373, September.
    2. Capra, C. Monica & Goeree, Jacob K. & Gomez, Rosario & Holt, Charles A., 2000. "Predation, asymmetric information and strategic behavior in the classroom: an experimental approach to the teaching of industrial organization," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 205-225, January.
    3. Oscar Molina Tejerina, 2004. "Precios predatorios: Una revisión teórica y evidencia experimental," Investigación & Desarrollo 0104, Universidad Privada Boliviana, revised Mar 2004.
    4. Mikkers, Misja, 2016. "The Dutch Healthcare System in International Perspective," Other publications TiSEM 800704a0-24ee-4830-8659-2, Tilburg University, School of Economics and Management.
    5. Michelle Sovinsky Goeree & Jeroen Hinloopen, 2005. "Cooperation in the Classroom: Experimenting with Research Joint Ventures," General Economics and Teaching 0503005, EconWPA.
    6. repec:taf:oaefxx:v:3:y:2015:i:1:p:1115619 is not listed on IDEAS
    7. Tsao, Hsiu-Yuan & Pitt, Leyland F. & Berthon, Pierre, 2006. "An experimental study of brand signal quality of products in an asymmetric information environment," Omega, Elsevier, vol. 34(4), pages 397-405, August.

    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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