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Few bad apples or plenty of lemons: which makes it harder to market plums?

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Abstract

We analyse a competitive commodity market with a large number of buyers and sellers where - a. Individual qualities, either high or low, are not observable by buyers; b. Sellers strategically announce prices and buyers decide whether to buy having observed sellers' actions. We find that the set of robust equilibria includes only fully separating equilibria. In any robust equilibrium the low quality is always traded. The high quality is traded if demand is sufficiently strong, so that low quality sellers are unable to satisfy all buyers, and is never traded otherwise. Hence, few rotten apples is better than a plentiful of lemons for plums' sellers.

Suggested Citation

  • F. Adriani & LG Deidda, 2004. "Few bad apples or plenty of lemons: which makes it harder to market plums?," Working Paper CRENoS 200413, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:200413
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    Cited by:

    1. G. Marletto, 2006. "La politica dei trasporti come politica per l'innovazione: spunti da un approccio evolutivo," Working Paper CRENoS 200605, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    2. OA Carboni & G Medda, 2007. "Government Size and the Composition of Public Spending in a Neoclassical Growth Model," Working Paper CRENoS 200701, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.

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    More about this item

    Keywords

    adverse selection; d1; price-setting; off-equilibrium; market for lemons;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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