With information asymetry, buyers impose a risk penalty on their offer price equal to the proportion of the products they believe to be “lemons”. So if the buyer thinks 10% of used cars are lemons, then, absent some external signal, they will insist on a 10% discount from market price. Sellers who know their product is not a lemon are less willing to accept 90% of market value, so they transact less often. Sellers who know their product is a lemon are happy to take 90% of market value, so they transact more often. This dymamic increases the proportion of “lemons” in the market. Buyers impose larger risk penalties based on the increased frequency of “lemons”, further reducing offer prices, further reducing the overall quality of the market until the market goes into failure and no transactions occur.

In this kind of market, buyers need exogenous signals of product quality. This is why CPO cars sell at a premium and why dealerships with big shiny showrooms command a premium price for similar vehicles sold at smaller or less classy dealerships. This is also why 1-owner cars and cars with clean Carfax reports sell faster and for more money.