Academic journal article The Journal of Consumer Affairs

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

Academic journal article The Journal of Consumer Affairs

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

Article excerpt

Significant progress has been made in researching quality and choice in well functioning markets. But immense resources have been devoted to matters like product differentiation or brand choices without a corresponding effort to issues that may be even more important to consumer welfare at home and abroad. For example, what is our explanation for the startling number of useless or hazardous products in international commerce? The United Nations List of banned or restricted products contains, by our count, over 11,000 trade names (United Nations Secretariat 1991). By no means are most of these sold by little known firms with no reputation to protect. How do we explain that one of the fastest growing segments of the market is the trade in fakes, counterfeits, and frauds? One estimate places the growth rate of the value of sales of such products at 1100 percent for the 1983-1992 period ("European Measures Against Counterfeits" 1992, 6), and most estimates place the current value at between six percent and nine percent of world trade ("Contrefacon 1991; Counterfeit Intelligence Bureau 1987; International Federation of Senior Police Officers 1992; "La Piraterie Intellectuelle Ne Cesse d'Augmenter" 1992). The significant step in understanding these important issues comes from the explicit recognition of economic factors determining when it is profitable to hide information about quality.

Economic resources devoted to concealing hazards or defects are, by their clandestine nature, rarely evident. Given the secretive character of the activity, it is all the more remarkable that so many examples can be cited. Concealment as a general problem may date from the move from home production to the market economy. In the 1700s bakers could buy "sharp whites" (flour containing alum) to be mixed in with old flour to conceal its quality so that bread which would otherwise be grey would be white (Accum 1820). Industry was organized to supply the adulterants. Accum writes: "There are wholesale manufacturing chemists, whose sole business is to crystallize alum, in such a form as will adapt this salt to the purpose of being mixed in a crystalline state with the crystals of common salt, to disguise the character of the compound" (1820, 136). Likewise industry could supply bakers with three grades of defective pepper and a broad range of other adulterants. Thus throughout history a supplying industry responding to market incentives and providing inputs to help produce concealment has existed. In the 1990s, alum is still used to "whiten" bread made from old wheat in India. One can also buy white stones ground precisely to resemble rice or wood created as a careful imitation of wheat. "Food adulteration, in fact, is a highly organized industry in India" (Mandana 1982, 32). One estimate reported that as much of 25 percent of the food passing through markets in India had been adulterated (Jacob 1976).

In the 1960s, when over-the-counter (OTC) drugs were first evaluated by two separate scientific panels in the United Kingdom, fully 35 percent of OTC products were found to be "undesirable preparations" - defined as irrational combinations, obsolete preparations, or ineffective or dangerous drugs (Sainsbury 1967). A similar study was conducted in the United States, and "At the end of 1973, actions had been taken to remove 5,516 drugs from the market" (U.S. Department of Health and Human Services 1974, 37). Even so, in 1981 the market value of useless OTC products was still $524 million (Kaufman and Rabinowitz 1983). This is not sufficiently different from what Kallet and Schlink wrote about in 100,000,000 Guinea Pigs (1933). Further, one of the largest testing laboratories in the United States, Industrial BioTest (IBT), was found by the Food and Drug Administration to be selling test results based on ". . . reports on the use of live test animals after they had been reported killed in earlier experiments" (Science News 1981, 11). In addition "IBT's records showed evidence of . …

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