Kiwifruit is subject to imperfect information because buyers cannot determine its sweetness its quality level by simple inspection. The sweetness level at the time of consumption is determined by the fruit s maturity its sugar content at the time of harvest. Kiwifruit continues to convert starch into sugar after it is picked, but fruit that is picked early has a low sugar content at harvest time and never tastes sweet. There is asymmetric information because producers know the maturity of the fruit, but fruit wholesalers and grocery stores, who buy fruit at the time of harvest, cannot determine whether a piece of fruit will ultimately be sweet or sour.
Before 1987, kiwifruit from California suffered from the lemons problem. Maturity levels of the fruit varied across producers. On average, the sugar content at the time of harvest was below the industry standard, established by kiwifruit from New Zealand. Given the large number of lemons among California kiwifruit, grocery stores were not willing to pay as much for California fruit. In other words, the presence of low-quality (immature) fruit in the mixed market pulled down the price of California fruit. Mature kiwifruit is more costly to produce than immature fruit, and the low price decreased the production of mature fruit. This result is similar to the way low used-car prices decrease the number of high-quality used cars on the market. In general, adverse selection led to low prices and a relatively large volume of low quality kiwifruit from California.