Is the market for security products a "market for lemons"? (and other market observations)

MrBrian · Nov 10, 2014

From A Security Market for Lemons (2007):

[...] But there's a deeper question: Why are there so many bad security products out there? It's not just that designing good security is hard -- although it is -- and it's not just that anyone can design a security product that he himself cannot break. Why do mediocre security products beat the good ones in the marketplace?

In 1970, American economist George Akerlof wrote a paper called "The Market for 'Lemons'" (abstract and article for pay here), which established asymmetrical information theory. He eventually won a Nobel Prize for his work, which looks at markets where the seller knows a lot more about the product than the buyer.
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From paper "Impact of Network Externality in the Security Software Market" (2011):

Abstract

The market for security software has witnessed an unprecedented growth in recent years. A closer examination of this market reveals certain idiosyncrasies that are not observed in a traditional software market. For example, it is a highly competitive market involving several major vendors, often with a very aggressive pricing strategy adopted by new entrants. Yet, the market coverage seems to be quite low. Prior research has not attempted to explain what aspects of security software make this market deviate from the traditional ones. In this paper, we develop a quantitative model to study this market. Our model identifies the primary reason behind this behavior—that of a negative network externality effect, which pulls the market in exactly the opposite direction when compared to the positive network externality observed in traditional software markets. Using our model, we first show that a monopoly security software market has a lower market coverage, a higher price, and a higher revenue compared to a traditional monopoly market. We then extend our analysis to an oligopoly competition. There is a unique symmetric equilibrium in the oligopoly competition, and we find that the number of vendors in the security software market tends to be larger than that in a traditional market. We also consider the effect of a new entry in an oligopoly market. Next, we evaluate the strategy of vertical differentiation. We find that, while this strategy is not desired by a monopolist, it may be adopted in a duopoly competition if the cost of development is sufficiently high, although the feasible region for differentiation is more restricted than in a traditional market. Finally, we consider two extensions to the model to account for two other possible types of network externality and find that our results hold in these extended models as well. Overall, our results highlight the unique nature of the security software market, furnish rigorous explanation for several counter-intuitive observations in the real world, and provide managerial insights for vendors on market competition and product development strategies.
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Download: hxxps://www.mgmt.purdue.edu/academics/MIS/workshop/papers/DeyZhang.pdf .

Definition of Network Externalities.

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Is the market for security products a "market for lemons"? (and other market observations)

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Is the market for security products a "market for lemons"? (and other market observations)

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