Lemons Market
Adverse selection collapse under information asymmetry
Buyers see no quality; they offer the price of an average car. At that offer only below-average sellers accept, so buyers re-price, more sellers leave, the price falls again. Watch the unraveling iterate toward either partial trade or total collapse.
Fixed-point:
Buyers cannot observe quality, only bet on the pool. Every time buyers lower their offer, the sellers with better cars withdraw, pushing average quality down, which justifies a still-lower offer. Unraveling. Akerlof (1970).
Quality vs. willingness
Price iteration
equilibrium P*
0.000
fraction traded
0.0%
avg. quality traded
0.000
surplus vs. efficient
0.0%
Widen the quality spread or drop γ and watch the market unravel — high-quality sellers withdraw first, dragging the buyer’s conditional expectation down, dragging the price down, until only the floor remains.