I wonder what the fallout will be for other car manufacturers as the Volkswagen scandal continues to unfold. Is it an opportunity for them or will Volkswagen’s dishonest dealings negatively impact upon them? Indeed, it’s possible that some of the other manufacturers have their own skeletons in the closet?
It’s been 45 years since this was first published but Akerlof’s paper “The Market for ‘Lemons’: Quality, Uncertainty and the Market Mechanism“. This paper is only 13 pages long and is well worth a read. You can read it here (http://socsci2.ucsd.edu/~aronatas/project/academic/Akerlof%20on%20Lemons.pdf). In the paper, Akerlof identified a weakness in traditional economic reasoning. Most analyses in economics began by assuming that the parties to any transaction were fully informed and thus making rational decisions in their own self-interest. Akerlof took aim at the first part of that assumption – that we’re fully informed. He enlisted the used-car market for what he called “a finger exercise to illustrate and develop” his ideas.
Used cars for sale he said fell into two broad categories: good and bad. Bad cars, or “lemons” are less desirable and so should be cheaper. The issue is that with used cars, unless the buyer is a car expert, only the seller knows whether the used car is a “lemon” or a “peach”. This leads to what he calls “an asymmetry in available information”. In other words, the seller is fully informed while the buyer is not.
This creates issues. In the case of used car sales for example, the buyer may be suspicious and so wonders if the car is worth the price being asked meaning that they may only be willing to pay far less than what the seller is requesting. On the other hand, and this is where I think it gets tricky for Volkswagen’s competitors, suppose they are selling vehicles that they know are peaches, will buyers start to treat them like lemon peddlers? “Dishonest dealings tend to drive honest dealings out of the market”, Akerlof wrote. “The presence of people who wish to pawn bad wares as good wares tends to drive out legitimate business”.
In the 21st century, a fundamental tenet of commercial sustainability must surely be trust. Trust in a brand is based on the pillars of competence, honesty and concern for the customer. Volkswagen’s behaviour would appear to have breached these pillars. Volkswagen’s reputation may be difficult to repair, if possible at all.
Now for many kinds of products and services, this asymmetry of information is no longer an issue. Consumers have the ability to purchase reviews via social media and dedicated review sites meaning that sellers who actively try to dupe customers won’t, one would expect, be in business for long. However, like the analogy of used cars that Akerlof used to make his point, the same reasoning could be applied to products and sectors where the seller is far more literate than the buyer about the product being sold, banking and insurance products come to mind. It’s no wonder then that the only two words of Latin that I can remember from school are “caveat emptor” – buyer beware.
What has this go to do with marketing? The discipline of marketing is far more than simply pushing out the kinds of messages that portray the company the way it wants to be portrayed. Marketing is everybody’s responsibility, from the CEO all the way down to the workers on the shop floor. Trust-based marketing focuses on customer advocacy techniques that assist consumers in making informed purchase decisions based on provide accurate information to support consumers from pre purchase all the way through to post purchase relationship management and support. While we don’t yet know if Volkswagen will weather the storm, the lesson for its competitors should be that being honest and open is the best path to building consumer trust , creating a more loyal customer base and remaining competitive in the 21st century.