Are you in the market for a used vehicle? If you are then there’s more you need to know then you already do!
Although the new-vehicle sale has plunged to the highest level and people are replacing their aging vehicles with shiny new ones the prices of new vehicles are at all times high. This leads buyers like you and us to look for used vehicles. But it can be challenging for buyers to figure out if they are getting a good deal.
We discovered that information problems exist to a greater potential in the car market. The sellers know far more than the buy. Even after careful examination, the buyer might still miss out on knowing what the seller has hidden. When one side is more informative than the other, it results in asymmetric information.
The Market for Lemons
Used car market often displays the implications of asymmetric information. This market has clever and informative sellers with a great knowledge of car condition and quality. Consider this, for example, the seller will know about the transmission and engine problems, maintenance history, as well as about other defects.
In simple words, the seller will actually know whether the car is lemon (car with defects) or cherry (the car without defects. The buyer stay sat disadvantage not knowing anything more but what the visuals display or the test drive shows. To understand this, further, consider an example of a buyer looking for a specific car make and model.
Let’s call it as Toyota Vitz 2015 model. The buyer is willing to pay Rs. 14 lac for a high quality used the car but Rs. 10 lac if the car is low quality (lemon). The buyer visits two sellers, one giving away a lemon and the other a cherry. The sellers are aware of the car condition and its history while the buyer does not see much difference in the two cars.
In plain words, there is asymmetric information. The buyer finally accepts believing neither the car is of high quality. So, buyer pays off the price below that of the high quality car: Rs. 12 lac. Take the larger used car market even for consideration; buyers behave the same her as well as they lack the information to distinguish between good or bad do they offer prices somewhere in the middle. The cycle of market inefficiency continues where sellers take the advantage.
Closing the Gap of Asymmetric Information
In countries where automobile industries have a remarkable repute, they have regulations that help buyers receive better information. Lemon laws regulate warranties on vehicles and protect consumers from defective cars. This, however, is not the case in Pakistan used car market. Elsewhere, if the car has the warranty from the seller or is certified, it represents the cars highest quality.
Having a certified car in Pakistan can simply mean digging deeper to unveil the truth! However, to eliminate this gap of asymmetric information buyers can be a great help for themselves and for the sellers to get alarmed. Buyers should research and acquire knowledge or take a reliable personal car mechanic for a complete inspection.
Various other sources like Motor Traders and pakwheels.com are reliable sources for selling and purchasing used and new cars. Some of them even have their own car inspection teams that can assist with looking for defects hidden and overlooked. Otherwise, for a hassle free purchase, these online used car sites in Pakistan are the best way out.
The future of automobiles, however, will bring better and latest form of car history information provider-event data recorder (EDR), which is similar to the black box in a plane, but this is yet to happen in Pakistan.
Important Note- It’s always wise to seek information before buying a car or a house but less important before buying a frying pan or stapler.
Remember that when one party has more information than the other, the party with more information will be at advantage. This actually is a problem for both, seller and buyer, as the transaction that can benefit both fails to occur. However, if you can only seek out information before buying the used car, you can fill the asymmetric information gap and help the market grow.