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Stopping the Lemon Effect: How To Save The Refurbished Industry and The Circular Economy
The industry needs to be saved, one lemon at a time.
The refurbished electronics market seems to be doing great, at least if we go by the numbers of the refurbished smartphone market that have been bandied around so much, with the global refurbished smartphone market (13% y/y growth) outpacing the new smartphone market (3% y/y growth) in 2017. More recent studies show that 2018 was the first time that the global smartphone market has witnessed a decline for an entire year. Some would like to attribute that decline in part to the refurbished/pre-owned smartphone market’s growth.
There is also, of course, the fact that a recent category of higher quality devices that are more dust and water-resistant than ever before means that people can hold on to their devices for longer and then resell their phones for considerable value. A person that sells their smartphone within a year of purchase, for example, can expect to recoup 60–70% of the original cost when selling second-hand. These are all cause for celebration for the Fair Tech movement. With recycling efforts outpaced by the tremendous rate of electronics consumption, extending the lives of devices by holding on to our electronics for longer and supporting a circular economy model around them is a crucial element of fighting the e-waste crisis that we currently face as a nation and worldwide.
That said, it is far from time to bust out the champagne glasses. While sales are going well so far, Nobel-prize winning economist George Akerlof describes issues in his paper, “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” that already plague the refurbish/reuse aspect of the circular economy model in the electronics industry.
The Lemon Effect
A lemon, for those of you who are too young to remember, refers to a car that is found to be defective only after it has already been paid for. Before the age of CarMax and the Kelley Blue Book, buying a used car was a huge bet. There was a reason for that according to Akerlof: where there is an asymmetry of information — in plain English, a lack of transparency about quality from the sellers to the buyers — there is an incentive for sellers to offer lower quality goods while presenting them to be of higher quality. This dynamic is already at play even in the “certified refurbished” market, where unscrupulous sellers that are looking to make quick and easy sales are more than happy to get paid higher prices than what their products are actually worth. Some folks even label products refurbished that have not been properly inspected or repaired.
It’s no surprise that in a poll done by a refurbished electronics marketplace, of first time refurbished product buyers, 49.6% (a total of 453 respondents out of 917) said that they had not previously purchased refurbished devices because they didn’t feel sure about the quality of refurbished goods. “The Market for Lemons” paper states that in the long run, as buyers are disappointed with their lemons, new buyers begin to factor in the risk of purchasing a lemon in their decision-making. This drives prices down and also drives higher quality goods out of the market, essentially creating a market of junk and potentially causing it to collapse. In that case, we can kiss the circular economy for electronics goodbye.
Making Peaches Out Of Lemons
If the refurbished industry is to be saved, it’s going to need a big makeover — and not just a superficial one. While Akerlof suggested government intervention (which actually gave birth to the Magnusson-Moss Warranty Act) to help prevent the negative effects of quality uncertainty, some might say that it was actually CarMax that disrupted and turned around the image of the used car industry to make it what it is today. CarMax’s model, with detailed test inspections, a warranty and painless buying process, was selling five times more cars than the average new car dealer and 30 times more than the average used car dealer in 1995 — a mere two years after its first store opened. Soon after, competitors of various models began to emerge as the used car market became a more lucrative one. By 2012, used car dealers were selling at a rate comparable to new car sales (in that year, they sold $377 billion in used cars vs. the $316 billion in new car sales).
The refurbished industry is in exactly the same position as the used car market once was and is ripe for someone to take a leadership role. It is only once someone takes ownership of the refurbished device category — putting better standards in place and creating a better buying experience — that we can say that the refurbished market — and the circular economy model for electronic devices — can truly be sustained.