Comment by caseyy | Hacker News Reader

Comment by caseyy | Hacker News Reader

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> I don’t think this leads to market collapse

You must have read that the Market for Lemons is a type of market failure or collapse. Market failure (in macroeconomics) does not yet mean collapse. It describes a failure to allocate resources in the market such that the overall welfare of the market participants decreases. With this decrease may come a reduction in trade volume. When the trade volume decreases significantly, we call it a market collapse. Usually, some segment of the market that existed ceases to exist (example in a moment).

There is a demand for inferior goods and services, and a demand for superior goods. The demand for superior goods generally increases as the buyer becomes wealthier, and the demand for inferior goods generally increases as the buyer becomes less wealthy.

In this case, wealthier buyers cannot buy the superior relevant software previously available, even if they create demand for it. Therefore, we would say a market fault has developed as the market could not organize resources to meet this demand. Then, the volume of high-quality software sales drops dramatically. That market segment collapses, so you are describing a market collapse.

> There’s probably another name for this

You might be thinking about "regression to normal profits" or a "race to the bottom." The Market for Lemons is an adjacent scenario to both, where a collapse develops due to asymmetric information in the seller's favor. One note about macroecon — there's never just one market force or phenomenon affecting any real situation. It's always a mix of some established and obscure theories.

The Wikipedia page for Market for Lemons more or less summarizes it as a condition of defective products caused by information asymmetry, which can lead to adverse selection, which can lead to market collapse.

https://en.m.wikipedia.org/wiki/The_Market_for_Lemons

The Market for Lemons idea seems like it has merit in general but is too strong and too binary to apply broadly, that’s where I was headed with the suggestion for another name. It’s not that people want low quality. Nobody actually wants defective products. People are just price sensitive, and often don’t know what high quality is or how to find it (or how to price it), so obviously market forces will find a balance somewhere. And that balance is extremely likely to be lower on the quality scale than what people who care about high quality prefer. This is why I think you’re right about the software market tolerating low quality; it’s because market forces push everything toward low quality.

Once upon a time, the price of a product was often a good indicator of its quality. If you saw two products side by side on the shelf and one was more expensive, then you might assume that it was less likely to break or wear out soon.

Now it seems that the price has very little to do with quality. Cheaply made products might be priced higher just to give the appearance of quality. Even well known brands will cut corners to save a buck or two.

I have purchased things at bargain prices that did everything I wanted and more. I have also paid a lot for things that disappointed me greatly.

This is a good point.

A big part of the drive towards lower prices is likely driven by companies exploiting that lack of information to deliver a low-quality product for a high price. Consumers rationally respond to this by just always picking the low-price product

Unless, of course, there's another factor (such as brand) that assures users they are receiving something worth spending extra on (and of course it's oh so easy for companies with such a reputation to temporarily juice returns if they are willing to make sacrifices)

What about furniture? From my childhood until now, it seems like furniture has really held out. Price is a pretty good indication of quality.

Within the (wide!) price tier in which most people buy furniture, almost everything is worse than IKEA but a lot of it’s 2-3x the price. You have to go even higher to get consistently-better-than-ikea, but most people won’t even see that kind of furniture when they go shopping for a new couch or kitchen table.

>Once upon a time, the price of a product was often a good indicator of its quality. If you saw two products side by side on the shelf and one was more expensive, then you might assume that it was less likely to break or wear out soon.

I don't think this has ever actually been true. There was plenty of expensive snake oil in 1800s America. There were plenty of expensive shit things. There always has been. Christ, that ancient tablet of that guy complaining about copper quality is one of the oldest written documents we have, and I can assure you that copper was not cheap.

Price has never been a signal of quality because it wouldn't make any sense. The price is set by the seller. That's the only signal it can convey; what the seller expects you to pay. There's never been a perfectly efficient market where a seller is forced to set the price of something to match it's value or quality. There has always been information asymmetry. There has always been a difficulty in finding out whether that thing for sale is actually worth it.

The papers results are only barley accounted for in reality, as it misses many real world tactics and heuristics people actually use to get around the problem. Let alone many other market mechanism that exist around that market.

The real effects are way smaller then claimed in the paper and market collapses don't or almost never happen for that reason.

And in real live many people drive reliable used cars. And may people buy used cars over and over again. Because its not about verification, only about picking one of the better options, and many heuristics can be applied to do that.

If market forces push everything towards lower quality. Why are cars (and everything else) today so much more energy efficient and more comfortable. Why are phones so much better? Why is pretty much every product today so much better then it was 50 years ago?

Somehow everything gets worse, yet my operating system on my computer crashes far less often. Despite many more features. My hardware fails less often to, harddisk, then and now, its a joke.

The food is better, both in quality and diversity when I go to restaurants.

I really don't understand how people can argue against this claiming quality is going down over time. Outside of very specific things very temporarily, like twitter, this isn't the case.

There are many reason for this, and only focusing on finding a list of as many 'market failures' as economist can come up with, misses so much about how in the real world people (including governments) deal with many of these things.

By the way, inferior goods are not necessarily poor-quality products, though there is a meaningful correlation, and I based my original comment on it. Still, a OnePlus Android phone is considered an inferior good; an iPhone (or a Samsung Galaxy Android phone) is considered superior. Both are of excellent quality and better than one another in key areas. It's more about how wealth, brand perception, and overall market sentiment affect their demand. OnePlus phones will be in more demand during recessions, and demand for iPhones and Samsung Galaxys will decrease.

No objection to your use/non-use of the Market for Lemons label. Just wanted to clarify a possible misconception.

P.S. Apologies for editing this comment late. I thought the original version wasn't very concise.

> A OnePlus Android phone is considered an inferior good; an iPhone (or a Samsung Galaxy Android phone) is considered superior. Both are of excellent quality

No, the inferior good is a device with 2GB RAM, a poor quality battery, easy to crack screen, a poor camera. poor RF design and thus less stable connectivity, and poor mechanical assembly. But it has its market segment because it costs like 15% of the cost of an iPhone. Some people just cannot afford the expensive high-quality goods at all. Some people, slightly better-off, sometimes don't see the point to "overpay" because they are used to the bottom-tier functionality and can't imagine how much higher quality may be materially beneficial in comparison.

In other words, many people have low expectations, and low resources to match. It is a large market to address once a product-market fit was demonstrated in the high-end segment.

I mean "inferior good" as a macroeconomics term: https://www.investopedia.com/terms/i/inferior-good.asp. And the point of my comment is to show that product quality alone doesn't determine whether it's an inferior good.

I see your point. But the choice between an iPhone and a Galaxy is mostly the ecosystem. And the choice between OnePlus and a Galaxy S is mostly about the quality of the camera. And the choice between a Galaxy and a Xioami is mostly about trusting a Chinese brand (not for its technical merits; they make excellent devices). The real quality / price differentiation, to my mind, lies farther down the scale.

That is, the choice between a $10 organic grass-fed milk and $8 organic grass-fed milk is literally a matter of taste, not the $2 price difference. The real price/quality choice is between the $10 fancy organic milk, $4.99 okay milk, and $2.49 bottom-shelf milk. They attract materially different customer segments.

There are many behavioral economics ideas about smartphone choices. There are various psychological aspects, such as lifestyle, status, social and personal values, and political influences. That is all true.

The strongest decider for whether a good will show positive or negative elastic demand (and be considered superior or inferior) is probably how it's branded, pricing strategy included. For example, wealthy people shop in boutiques more than large retail centers, though the items sold are often sourced from the same suppliers. The difference? Branding, including pricing.

You're right about basic goods, such as groceries. Especially goods that are almost perfectly identical and freely substitutable, like milk. What's a superior or inferior good becomes hard to guess when there is a high degree of differentiation (as you say, ecosystems, cameras, security). It's easier to measure than predict.

Anyway, this is all a "fun fact." My original comment really does make the assumption that software, which is relatively substitutable, is like the milk example — the price and the inferiority/superiority are strongly correlated. And the entire expensive software market has collapsed like the expensive secondary market for used cars.

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