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The Problem of Adverse Selection
Does this apply to web development?
Pedent




msg:3510440
 11:59 am on Nov 21, 2007 (gmt 0)

Reading a book called "The Undercover Economist" (which I highly recommend), I've come across something called "the problem of adverse selection". Not having a background in economics, I'm curious about how much this problem applies to web development. Can anyone help?

Here's the classic example of the problem: In the used car market, buyers struggle to distinguish good cars ("peaches") from bad cars ("lemons"). Sellers have a good idea whether their car is a peach or a lemon. It's therefore rational for a potential buyer to offer whatever an average car is worth (as they can't tell whether this particular car is a peach of a lemon), but only rational for owners of lemons to sell at that price. Because of this, only lemons are ever sold. To the extent that that's understood by buyers, offers will fall further and the quality of the cars sold will follow. The end result: only the worst cars are traded; no one ever buys a peach.

Of course, that's all theory. In the real world, buyers do have some ability to distinguish peaches from lemons (whether by the reputation of the seller or their own knowledge of cars), so it is possible to buy a decent car (even if it's difficult). Still, the difference in knowledge between buyer and seller does damage the market to some extent.

Does this also apply to web development? Can we say: In the web development market, buyers struggle to distinguish a well-coded site from a poorly coded site. Developers have a good idea of the quality of their work. It's therefore rational for a potential client to offer whatever a half-decent job is worth (as they won't be able to tell whether their site has been well-coded or poorly coded), but only rational for someone to do a half-decent (or worse) job for that price. Because of this, only sub-standard web development is ever sold. To the extent that that's understood by clients, offers will fall further and the quality of work sold will follow. The end result: only the worst web development work is ever sold; no one ever buys a peach of a website.

I know that it is possible, in the real world, to buy good web development (just as it's possible to buy a good used car). I'm just curious whether the difference in knowledge between client and web developer is something that damages the web development market in the same way as the difference in knowledge between buyers and sellers of used cars is something that damages the used car market. Or is there some difference between web development and used cars that means that the problem of adverse selection doesn't apply?

 

vincevincevince




msg:3510443
 12:05 pm on Nov 21, 2007 (gmt 0)

If you sell peach websites, then you will generally point out what's so peachy about your sites and be recommended by past clients to new clients as a peach merchant. Very few developers mix peaches and lemons; they either make peaches or they make lemons.

Lemon sellers online are quite easy to spot by their yellow colour schemes. In addition, their clients have poorly functional websites and their website is full of positive testimonials.

rocknbil




msg:3510769
 7:07 pm on Nov 21, 2007 (gmt 0)

It's therefore rational for a potential client to offer whatever a half-decent job is worth (as they won't be able to tell whether their site has been well-coded or poorly coded), but only rational for someone to do a half-decent (or worse) job for that price.

This clearly states what I try to gently get across to low-budget clients, I agree! I don't know if I go along with the absolute "lemons or peaches" idea though - VVV, haven't you ever been "trapped" by a customer's budget, or do you just turn the work away if you can't do it the way you know it should be done?

Pedent




msg:3511402
 3:05 pm on Nov 22, 2007 (gmt 0)

I don't think it is always that easy for a client to tell a peach from a lemon. Lemons may have bloated code and accessibility problems (reducing traffic), poor usability (reducing conversions), even unnecessary security vulnerabilities, but still look good to the client.

One thing that might complicate the situation would be clients not knowing that there are peaches and lemons (i.e. not understanding that there are better and worse ways of building websites). Presumably this would depress the market as clients would only be willing to pay the price of a lemon for any web work. Is this what happens on some freelancer forums?

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