Peaches VS lemons: The industries that fought their way out of a sour market
03 June 2022
We’ve previously broken down the lemons market, squeezing every sour drop of info out in an analysis of how the economic theory relates to property management.
There are plenty of industries that have worked to overcome the lemons market dynamics. None of them provide a perfect parallel with our industry, but they do give some food for thought.
Let’s take a deep dive into how two industries battled their lemon status and explore who triumphed (turning into a sweet peach) and who perished, keeping their sour status.
Tourism-related industries have been transformed over the past decade – a classic case of overcoming lemons market dynamics.
Not that long ago, a trip to a new country or town was a venture into the unknown. What places should we visit? Where should we stay? Where should we eat?
Then, once in Rome, we would wander the streets armed only with a tourist guide or perhaps a hotel recommendation on what place has the best pizza or pasta, or which museum was on the ‘must do’ list. Of course, the advice from the hotel concierge was on commission and the tourist guide may have been years out of date.
The end result? The ‘tourist trap’.
“The tourist trap was a manifestation of the lemons market. It had all the hallmarks of one – information asymmetry, an incentive for bad sellers to cheat and no way for a buyer to punish a bad seller.”
— Ben White
After all, a traveler would always know less about Roman restaurants than the Romans, those giving advice were not acting in the traveler’s best interests, and each restaurant had every incentive to project a first class image to get tourists in the door, but then dud them with bad food and high prices. They knew those tourists would never come back or be a long standing customer, so why care what they thought of the place afterwards? And, once the tourist had eaten the bad meal, there was almost nothing they could do to punish that restaurant or spread the word.
The internet has changed that dynamic profoundly.
“The best examples of influencing platforms are TripAdvisor and Yelp. These and other sites use crowdsourcing to tip the balance of power away from the sellers and towards the buyers.”
— Ben White
Now tourists can know as much about restaurants in Rome as the Romans. Travelers no longer have to rely on gimmicks to find a good restaurant. Importantly, if a tourist gets a bad meal or service, they can easily get revenge on the provider with a bad review.
Exactly the same dynamics apply to hotels, museums, markets and other elements of the tourism industry.
It’s easy to imagine the first instincts of these business operators when TripAdvisor was launched. Many would have put their heads in the sand and proclaimed that no one would ever search for restaurants or hotels that way. “Our brand is too strong.” “No one will trust the reviews of a stranger.” Then, as it started to take hold, some no doubt called for a boycott. “It is going to destroy our industry!” “We have no way of defending ourselves!” “I want my business listing removed!” The protests would have been many.
Despite all that, the best in the industry would have seen the opportunity. Finally, here would be the chance for a great little restaurant to rise above the masses, or for a boutique Roman hotel to finally be discovered.
Instead of ignoring the reviews in the hope that they’ll go away, the most confident ones started to engage with them.
Today, the best hotels and restaurants actively ask their customers to review them publicly, so confident in their service that they genuinely want the transparency so they can continue learning and improving, but also to signal to the world that they value that transparency.
These days, the tourist trap is becoming a relic of the past.
“Crowdsourcing and transparency has given the consumer more power in the hospitality industry.”
— Ben White
Fewer people get ripped off, so the total satisfaction levels have increased. The best hotels and restaurants thrive while their fees increase and the worst ones get driven out of business. It’s a healthier marketplace.
The taxi industry
Unfortunately, not all participants in lemons markets are able to address their issues and survive. Perhaps the best and most dramatic example of that is the rise of Uber and the subsequent decline in the taxi industry.
For a generation, the taxi industry had a monopoly over its services. Despite being common knowledge that virtually every member of the public found the service deeply inadequate – no taxis at peak times, poor service, bad driving, and high payment surcharges – the industry did nothing to address those issues. Instead, it was relaxed, comfortable in the belief that they’d been given a government monopoly and so the consumer dynamics were irrelevant.
Eventually (and inevitably), the lemons market catches up to everyone…
In the case of the taxi industry, all it took was some relatively simple innovation, tremendously executed, to enable consumers to bypass taxis entirely and find a better and more reliable service, with flexible pricing that takes into account the quality of vehicle desired and changing market dynamics of supply and demand.
In the midst of this revolution, a dying taxi industry continues pressuring governments to protect it from the consumer, although there aren’t many times in history where a genie of this sort has successfully been put back into a bottle. Perhaps the taxi industry will respond with similar innovations to Uber, but one suspects that the cultural deficiencies in the taxi industry will cause it to be too slow to effect the necessary change. In the meantime, the value of taxi licenses has fallen significantly.
“The lesson for all of us is just how quickly things can change. Everything is faster now. Incumbency is no protection and in fact, can create a cultural dynamic that will ultimately lead to the industry’s downfall.”
— Ben White
Innovation is gathering pace and while the used car industry had a generation to fix itself, a similar lemons market dynamic in any other industry today may only offer a few years’ grace to the existing participants.
When I read about what’s happened in these industries and others like them, I’m both concerned and optimistic.
I’m concerned because our industry clearly believes it has to exist, just because it always has existed. That complacency is not a good thing. It lets us avoid the serious and necessary discussions about what’s structurally weak in our industry and what we might do to address it.
In the case of lettings and property management, why should we assume that real estate agencies will always be the center of this industry? Is it possible that given the increasing regulation and compliance issues, perhaps accountancies or law firms could one day also be property managers? Web-based companies have already emerged to connect investors and tenants directly. Might an investor prefer to use an internet platform to send a work order to the highest rated plumber?
“What frustrations do our clients have with our industry? Are we prepared to accept their feedback and commit to addressing the common issues?”
— Ben White
I am firmly convinced that the biggest threat to our industry is the poorer quality agents among us and our collective tolerance of them. The existence of poorer quality agents is the key factor driving the lemons market dynamics, making it hard for the best agents to get the credit and economic benefits they deserve. If we don’t find a way to credibly prove to the community that the good ones are good and the bad ones are bad, we’ll all end up at the bottom.
All of this will require collective action and commitment. It will require at least some of us to take the risk and refuse to play by the rules of the poor quality agents, while other good agents will need to follow that lead.
The lessons from the experiences of these other industries are that either we need to change and innovate, or someone else will force us to – perhaps taking the property industry from us entirely. Every industry is open to this risk and ours is no exception.