Market certainty

The Market for Lemons was a controversial piece of research published by Nobel Prize-winning academic, George Akerlof in 1970 that focused on the used car market.  Up until his work was published, most economists believed that markets would allow everyone willing to sell goods at a certain price to make deals with anyone who wanted to buy goods at that price – the basic features of the model of price equilibrium.

Akerlof’s paper examined how the quality of goods traded in a market can degrade in the presence of information asymmetry between buyers and sellers, leaving only “lemons” behind and how prices can determine the quality of goods traded on the market. Low prices drive away sellers of high-quality goods, leaving only ‘lemons’ behind. Akerlof could have quite easily used the football as his area for study, with the ‘lemons’ referring to players that the bigger teams don’t want and the smaller teams buy, thinking because they were on the books of a bigger team, they were actually good players. In the case of a football club, the “market” is their own league and cup campaign.

As a football club who hold a player’s contract has more information about the player than a potential buying club, there is an inherent risk in any transfer. It is a fallacy that just because a player has played for a Premier League side he will be of Premier League quality if he took a step down in terms of standard. Most Non-League clubs have players on their books who were once attached in one way or another to a professional club. The reason why they end up in the Non-Leagues is often down to specific circumstances but it is also the case that the professional club made a mistake in initially recruiting them. The amount of information available to clubs today about individual players continues to grow and in many instances there shouldn’t be an excuse for buying or registering a ‘lemon’, but virtually every manager in the Non-Leagues will name at least one player in their squad who could fall into this category.

Akerlof’s research showed that sellers of better-than-average cars to sell would be prepared to withdraw their vehicles from the market if it was impossible for them to get a fair price from a buyer who is unable to tell whether that car is a lemon or not. Football clubs also need a way to ensure that they weren’t buying a crock.

He suggested that there could be a mechanism put in place to allow a buyer to “borrow” or “test” a car for a short period so that the buyer could determine its quality. In footballing terms, this is what the loan system offers – a system that allows a club to fulfil a short-term need which could result in a fair price being determined between the buying and selling club.  Furthermore, in line with Akerlof’s suggestion it could be concluded that if a player is passed from club to club on loan then he is a lemon, just like a used car that has had dozens of owners.

Football clubs that are desperate to sign a player for a particular position, perhaps due to injury, are often held to ransom by selling clubs, knowing that they can try and extract more money for a player who is completely over-valued. The alternative is often that they go into the loan market where they may get some short-term gain by utilising a player, who may not be motivated as he isn’t wanted by his own club.

And that, ladies and gentlemen, is the theory of Market Certainty.

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