Market for lemons

We don’t always get the memes we deserve. When a good thing gets a bad label, you must invest in a better one. The used car market has a ‘lemon’ problem as it was referred to by George Akerlof, an American Economist. Lemons are cars that are found to be defective after being sold. Buyers have to factor in that risk when buying a car, which drags down the price of all used cars – even those in good condition. Humans are Bayesian thinkers, meaning they factor in their prior assumptions around how many cars on average are lemons, into their calculation of the risk of this particular car being a lemon. The less able they are to distinguish between good and bad cars, the higher the penalty for honest car sellers. This market failure drives the best sellers out of the market, because they can’t command the premium price they’re owed, further decreasing the average quality, leading to a downward economic spiral.

The solution is attaching memes to the best cars, that the worst cars can’t replicate. For example the brand name of a dealership confers some relative level of quality assurance. They invest in advertising, pay for business insurance, offer a money back guarantee, rent a prime location lot, and have full time employees. None of these things would make sense if they only planned on selling one dud car before disappearing. Through these costly investments they’re signalling willingness to be held to a higher standard, reducing risk and earning a higher price. Dealers are more sophisticated actors than the average car buyer, because they are buying cars all the time. Therefore they are incentivised to invest in systems for avoiding lemons, and are effectively renting that system to you when you make a purchase. Yes you may pay a price premium going through the dealer, but the corresponding decrease in risk makes it worthwhile. Even the presence of dealerships in the market drive out bad actors. Most of the unsophisticated buyers start buying from dealers, leaving only those who know what they’re doing. The risk of getting caught selling a dodgy car goes up considerably.

We see this same dynamic in play in the job market whenever a profession develops a ‘lemon’ problem. After marketers wasted millions on billboards in the first dotcom bubble, marketers in Silicon Valley rebranded themselves as ‘growth hackers’. This was a signal that they were willing to be held to measurable short-term results. This only works if the label is costly, and can’t be easily faked. A job with ‘hacker’ in the title isn’t a feasible option for a ‘serious’ marketer with a track record driving long term value for Fortune 500 brands. Which works perfectly, because these are precisely the people Start-ups want to avoid. These semantic schisms occur in every discipline attempting to break ties with the past in order to signal relative quality improvements: Business Analysts become Data Scientists, Software Engineers become Full-Stack Developers and Sales Reps become Customer Success. If your meme gets polluted, it’s time to rebrand with new memes.

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