The Market for Lemons: The case of Developing Countries

When Akerlof the famous information economist and Nobel prize winner wrote about the market for lemons describing the tendency of sellers to cheat customers of goods whose quality may not be verified until a good is consumed, some readers of the article including myself were far from  convinced that he had a less controversial point. Five years since I first read the article, I am of the opinion that what he theorised in the article applies even more in markets of societies where good and service provisioning faces many challenges and the few providers that exist do enjoy monopoly power in the short and medium run.

In developing countries including Malawi, one notes the conspicuous lack of service providers and the difficulties associated with entry of firms on the markets. The difficulty associated with firm entry on the markets implies that at any point in time, there are fewer service providers relative to demand and as a result markets do not clear. Prices and quality that prevail are those associated with unmet demand. Under such conditions most firms lack the market incentive to be efficient so that they are not concerned with provision of quality services because they know the consumer has no choice.

To put it into context let's come up with some obvious examples and we will deliberately avoid mentioning names of service providers who surely have taken advantage of the situation to dupe consumers. In Malawi one notes that for some reason, we have very few shops selling electronic and in general manufactured goods (though not relevant, I will mention to those interested that most of these shops are owned by foreigners such as Asians, Nigerians, Tanzanians et cetera and too few are held by Malawians ) in town. The fewness of these shops implies that in general the supply of goods and services is surpassed by far by the existing aggregate demand and as a consequence most of these shops are not concerned with providing quality and durable goods. They are however concerned with selling as many items as possible at as higher prices as possible. If customers knew the quality of the goods and services being offered, they would make reasoned decisions whether to buy or not. The problem is that until one buys one item oneself, one would never know whether the product was durable or not.  Now, if information transfer between customers was rapid, the long run would be associated with improvements in services and quality offered but in a country like Malawi where information transfer is not so easy, it is unthinkable whether consumers would someday come together in their decision against poor quality services.

I remember one day in Lilongwe where one customer came into a Nigerian shop and wanted to return an item he had bought the previous day saying, 'inu tandibwezereni ndalama zanga chinthu chanu mchowonongeka' meaning (would you please give me my money because the item I bought is not functional) and the Nigerian, supposedly the owner of the shop just laughed and said 'ha-ha you meano you can come hiya wit your ehh broken thing'o and then ask for mone? Who do you think you are, who told you to take a broken thing'? I guess meaning 'you mean you can come in here with a broken item and claim money from us. By the way who told you to buy a broken thing? The man stood chin in hand and mouth agape...in disbelief. He had bought the item the last day and there was no justification for the treatment he had just received. By the time I left the place, they were still arguing.

To me that showed just an example of customer dissatisfaction. The sellers have taken advantage of the scarcity of competitors on the market to charge monopoly prices and deliver poor quality of products.

There are many examples of customers of treadle pumps, solar systems, boreholes, etc being cheated. The purpose of this paper is not to victimise such culprits but rather to warn them that silence in most cases does not mean cheaters will always go scot-free. As they say one can cheat one person forever, one may cheat a group of people forever but never all forever. There will be a time when unscrupulous sellers will face justice. Let us change for the better. As consumers, we depend on sellers and as sellers we surely depend on consumers. None can exist alone.

My advice to the good government of Bingu wa Muthariaka is that they should try to regulate the market in one way or the other to ensure that sellers provide goods and services at reasonable prices commensurate with quality. The government has already done many good things so far in the transport sector, the agricultural sectors among others, and I think since development is driven by a system of sectors, let them also look at the market regulation issue to foster the spirit for development.