Used cars in Poorland sold for about 20% less than new cars of the same model manufactured in the same year. However, price differences were reduced when certified used-car dealers entered into the market for used cars in Poorland

What explains this phenomenon?

Used cars usually sell for less when compared to new cars manufactured in the same year because buyers are worried about the quality of used cars; only the sellers know about the true quality of a used car. Therefore, they are not willing to pay as much for a used car as they are for a new car. This is exactly what happened in Poorland before the entry of certified used-car dealers in the market. However, when certified used-car dealers entered into the market, buyers had better information about the quality of the cars and therefore, were willing to pay more for good-quality cars. This is an example of signaling.