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Melons as Lemons: Asymmetric Information, Consumer Learning and Seller Reputation

CID Faculty Working Paper No. 396

Jie Bai, Harvard Kennedy School
March 2021


There is often a lack of reliable quality provision in many markets in developing countries and firms generally lack a reputation for quality. One potential explanation is that
mistrust due to past bad behavior can make reputation-building difficult. I examine this
hypothesis in a setting that features typical market conditions in developing countries:
the retail watermelon markets in a major Chinese city. I first demonstrate empirically
that there is substantial asymmetric information between sellers and buyers on quality
and a stark absence of quality premium at baseline. I then randomly introduce one of
two branding technologies into 40 out of 60 markets–one sticker label that is widely used
and counterfeited and one novel expensive laser-cut label. The experiment findings show
that laser-branding induced sellers to provide higher quality and led to higher sales profits.
However, after the intervention was withdrawn, all markets reverted back to baseline. I
incorporate the experimental variation into an empirical model of consumer learning and
seller reputation building. The results suggest that consumers are hesitant to upgrade their
perception under stickers, which makes reputation-building a low-return investment. While
the new technology enhances learning, the resulting increase in profits is not sufficient to
cover the fixed cost of the technology for small individual sellers. Counterfactual analysis
shows that information friction and fragmented market lead to significant under-provision
of quality. 

Affiliated Program: Evidence for Policy Design