CHERRIES, LEMONS, AND THE FTC: MINIMUM QUALITY STANDARDS IN THE RETAIL USED AUTOMOBILE INDUSTRY

The FTC initially considered two forms of regulation in the used automobile market, requiring dealers to either certify or warrant the mechanical condition of each automobile sold. Since the regulation would have been imposed only on dealers and not on private sellers, its effectiveness was dependent on the magnitude of the induced shift of sales into the private market. Accordingly, this paper employs a gametheoretic model to examine the theoretical conditions under which society could be expected to benefit from either regulatory alternative. Among other things, it is concluded that a socially beneficial minimum quality standard may not exist in some situations.