Lemon Laws

http://www.latimes.com/business/la-fi-lemonlaw9-2009may09,0,3217006.story

This article talks a lot about the market of lemons undermining the market of good cars. Lemon laws were created to help people who buy "lemons" or defective cars get their money back or the problem fixed. Recently several checks for these case from Chrysler have bounced due to the companies bankruptcy. With no guarentee against the buying of a lemon car, people's faith in the car industry is declining and they are less likely to want to buy a car or to pay as much for a good car. This is an especially crucial time as the auto industry needs all the money it can get. They must find a new way to signal the "good" cars or protect people from losing on "lemons" or else people will not buy/pay enough cars and they will continue to lose business and it will become a viscious cycle where only lemons are being sold and nobody is buying anything as suggested in the text.

It's quite a shame how the American car industry has taken a toll based on its history. Historically, American cars were known for their spacious sizes, usually equivalent to their comfort. However, their bad reputation of breaking down and poor reliability has really affected the minds of consumers, making them turn to well-known manufacturers for excellent reliability (i.e. Toyota, Honda).

It'll be a project to start a cascade to change this perception. With more negative news of the American car industry, it'll be hard to change it, but I suppose if the entry cost and cooperation efforts improve among famous car makers are made, maybe some progress can be done.

I know ,for instance, before GM axed Pontiac, the Pontiac's Vibe was a cooperative effort between Pontiac and Toyota. In fact, the same car design in the Pontiac is in Toyota's Matrix. Although perhaps the Vibe may have gotten negative reviews due to GM's reputation, the Matrix surprisingly got better reviews and is known as Toyota's car of the year. Perhaps, maybe the working efforts between industry leaders and the lower grounds could change something.

The industry's automaker leader, Toyota, should be careful though. I know slowly their some well-known cars that are manufactured in Mexico (i.e. Camry) are no longer recommended due to reliable issues. Maybe we can see a bounceback then.

I think although this is one case when a buyers' confidence in the market will wane due to one company's bankruptcy, the traditional methods of signaling quality should not be abandoned. Certifying used cars and offering extended warranties seem to convince people pretty well that a car is worth buying because it offers them a safety net in case the car is a lemon (which is rare because then the company wouldn't have certified it in the first place).

I think that even though Chrysler may not be able to pay back some buyers, the lemon laws should stay in effect and current signals of quality cars should be kept. Although the market may dip in activity due to a lack of confidence, it will recover. After all, this is just an isolated case in which buyers will not get reimbursed, and it is not likely to happen again. Also, in this economy, even though car companies are failing and things like this happen, more people are looking for used cars than before since they don't necessarily need the newest models.

Here is a website that talks about the market involving lemons and good cars.
http://www.economy-point.org/a/adverse-selection.html

This site reiterates some of the ideas learned in class about how lemons can actually reduce the number of good cars sold. Due to the presence of lemons, the buyer has a lessened expected value rather than assuming that each car is definitely worth its perceived value stated by the seller. In turn, this drives down the price that the buyer is willing to pay, which will make the seller raise the price passed the value of the seller. This will create a dormant market in which the seller won't sell good cars, and the buyer won't buy good cars. A solution mentioned on this website is to implement test drives. This is currently a part of most dealerships, and now it is clear why they are present. Test drives create a signal to whether a car is worth its value, which will not lower the buyer's expected value of the car. Test driving is one way to ensure that a buyer will not lower his/her expected value arbitrarily based on the lack of "private" information held by the seller.