Whether it’s Paul Frank or Ralph Lauren (RL) the temptation and desire to buy expensive clothing is programmed into many of us. A Nobel-prize winning economist, George Akerlof, studied the relationship that humans have between quality and price of goods sold. His studies ultimately were published as a part of a paper entitled, “The Market for Lemons.”
Dr. Akerlof determined that most consumers actually assess the quality of goods sold by the price of a product. Ultimately, this basic knowledge has fueled the continued success of designer retailers and upscale brands. In many instances, it’s irrelevant that the Polo costs $60. Instead, consumers looks at the pricey shirt and see potential and quality, regardless of the actual quality of the product.
“The paper by Akerlof describes how the interaction between quality heterogeneity and asymmetrical information can lead to the disappearance of a market where guarantees are indefinite. In this model, as quality is undistinguishable beforehand by the buyer (due to the asymmetry of information), incentives exist for the seller to pass off a low-quality good as a higher-quality one.
The buyer, however, takes this incentive into consideration, and takes the quality of the good to be uncertain. Only the average quality of the good will be considered, which in turn will have the side effect that goods that are above average in terms of quality will be driven out of the market. This mechanism is repeated until a no-trade equilibrium is reached.
As a consequence of the mechanism described in this paper, markets may fail to exist altogether in certain situations involving quality uncertainty. Examples include the market for used cars, the dearth of formal credit markets in developing countries and the unavailability of health insurance for the elderly (that is, in the absence of government programs such as Medicare).
However, not all players in a given market will follow the same rules or have the same aptitude of assessing quality. So there will always be a distinct advantage for some vendors to offer low-quality goods to the less-informed segment of a market that, on the whole, appears to be of reasonable quality and have reasonable guarantees of certainty. This is part of the basis for the idiom, buyer beware.
Ironically, there is no reciprocal danger of a market for a good product collapsing in this manner when the asymmetry is in favour of the buyer, that is to say, when the buyers can assess more accurately the quality of the products than the sellers. In this case, regular market forces of supply and demand will prevail, the sellers will get the highest price paid, and the trend will be to weed out products with prices in excess of their quality. This is likely the basis for the idiom that an informed consumer is a better consumer. An example of this might be the subjective quality of fine food and wines (beyond just safety and freshness issues). Individual consumers know best what they prefer to eat, and quality is almost always assessed in fine establishments by smell and taste before they pay. However, a definition of ‘highest quality’ for food and wine eludes providers. Thus, a large variety of better quality and higher priced restaurants are supported.” (SOURCE)
The truly brilliant part of the whole research paper is the very simple idea that consumers essentially ignore the goal of purchasing functional goods, in order to appease their want for apparently “upscale products.” Common throughout the report is the phrase, “asymmetric information.” Asymmetric information is when one party has more or better information than the other. When applying it to real life, retailers and designers have the key and knowledge of a certain goods quality, while the consumer is left in the dark.
Next time you walk into Macy’s or Abercrombie & Fitch (ANF) and see a plethora of great fashions, understand that as the consumer, you’re duped into thinking that one product is better than another. Also, the extra money you save by not buying expensive goods can easily be put towards future investments. Here’s a little tip, stocks have a slightly higher return then that $60 polo.
Disclosure: No Conflicts.
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