Information is asymmetric at the time of sale. Sellers, because they have inspected their cherries, know the fruit's quality—primarily size. On the other hand, buyers, who may be making their purchases from across the country, cannot inspect the cherries.

Cherries are sold in 10 different size categories, with the larger sizes worth more. For seven of these categories, cherries are sorted into classes of narrowly-defined sizes. Only the minimum size is specified for the other three categories, so the size of the unsorted cherries in these classes can differ substantially.

Because sorting is costly, a firm may decide not to sort and instead sell its high-quality (large) cherries mixed with smaller cherries at a lower minimum-size standard. Sorting firms sell in all 10 categories. Nonsorting firms sell their smallest cherries (13 cherries to a row) by themselves and sell all their other cherries in the lowest minimum-size, unsorted category (12 cherries or fewer to a row).

Buying cherries that are sorted by size reduces the potential lemons problem by providing useful information to buyers. An adverse-selection problem is more likely for the 81% of cherries that are sold unsorted.

A buyer of this lowest minimum-size, unsorted category knows whether the seller sorts. As a result, a buyer pays nonsorting firms up to 11.6% ($1.24 per box) more than sorting firms. Boxes from nonsorting firms include valuable large cherries as well as small ones, whereas those from sorting firms include almost exclusively minimum-size cherries because these firms sell their larger cherries separately.

SOURCE:

Rosenman, Robert E., and Wesley W. Wilson, "Quality Differentials and Prices: Are Cherries Lemons?" Journal of Industrial Economics, 39(6), December 1991:649-658.