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Give No Credence to Lemons! Some Lessons in Market Research

Fortnightly Magazine - January 15 1996

to) the pecuniary self-interest of a firm that produces high-quality work. No single indicator is conclusive, but confidence in the quality of work product reasonably ought to fall as the level of skepticism triggered by these indicators rises.

Competitive market information has objective value on several levels. Performing market research inhouse can increase the quality of competitive market information for strategic and routine uses, while simultaneously lowering research expenditures. t

James A. Montanye has provided consulting services to the telecommunications industry for more than 20 years, most recently as president of Cornell Consulting Group, Inc., an economics consultancy located in Falls Church, VA.

Quality and Value

Potentially Misleading Indicators

. Name and reputation

. Firm size and staff expertise

. Professional association memberships

. Warranties

. Price

Quality and Value

Potentially Useful Indicators

. Nondisclosure of survey questionnaires

. Poorly described research method

. Proprietary claims to underlying data

. Irreproducible results

. Disparities with internal estimates

. Missing baseline measures

. Form over substance

. Data sets of unknown size

. Two few firms

. Arithmetic indices of consumer choice

. Related service offerings

. Mitigating excuses

1 A discussion of the relevant economics appears in most "industrial organization" texbooks. One good source is Carlton, Dennis, and Perloff, Jeffrey, Modern Industrial Organization, Harper Collins Publishing, pp. 554-617 (1990).

2 See, Tirole, Jean, The Theory of Industrial Organization, MIT Press (1988), p. 112.

3 Regulated firms occasionally can profit strategically by transmitting faulty and tendentious market information to regulators. Firms employing this tactic expect, among other things, that regulators will interpret the imprimatur of an outside firm as a proxy for research quality. This aspect of "value" is not examined in this article.

4 The term "lemon" is used here to indicate goods of poor (i.e., "sour") quality. See, Akerlof, George, "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," 84 Quarterly Journal of Economics 488 (1970). Gresham's Law properly refers to the observed tendency for "bad" money (i.e., fiat money) to drive "good" money (e.g., precious metal) out of circulation as individuals hoard the "good" money as a store of value.

5 See, Carlton, Dennis, and Perloff, Jeffrey, Modern Industrial Organization, pp. 554-617 (1990).


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