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Competition and Price Transparency in the Market for Lemons: Experimental Evidence

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  • Olivier Bochet
  • Simon Siegenthaler

Abstract

In markets with asymmetric information, where equilibria are often inefficient, bargaining can help promote welfare. We design an experiment to examine the impact of competition and price transparency in such settings. Consistent with the theoretical predictions, we find that competition promotes efficiency if bargainers cannot observe each other's price offers. Contrary to the predictions, however, the efficiency-enhancing effect of competition persists even when offers are observable. We explore different behavioral explanations for the absence of a detrimental effect of price transparency. Remarkably, implementing the strategy method improves subjects' conditional reasoning, delivering the predicted loss in efficiency when offers are observable.

Suggested Citation

  • Olivier Bochet & Simon Siegenthaler, 2021. "Competition and Price Transparency in the Market for Lemons: Experimental Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 13(2), pages 113-140, May.
    • Handle: RePEc:aea:aejmic:v:13:y:2021:i:2:p:113-40
    DOI: 10.1257/mic.20170087
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    References listed on IDEAS

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    1. Raymond Deneckere & Meng-Yu Liang, 2006. "Bargaining with Interdependent Values," Econometrica, Econometric Society, vol. 74(5), pages 1309-1364, September.
    2. Johannes Hörner & Nicolas Vieille, 2009. "Public vs. Private Offers in the Market for Lemons," Econometrica, Econometric Society, vol. 77(1), pages 29-69, January.
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    Cited by:

    1. Dariel, Aurelie & Riedl, Arno & Siegenthaler, Simon, 2021. "Referral hiring and wage formation in a market with adverse selection," Games and Economic Behavior, Elsevier, vol. 130(C), pages 109-130.
    2. Evan M. Calford & Timothy N. Cason, 2021. "Contingent Reasoning and Dynamic Public Goods Provision," ANU Working Papers in Economics and Econometrics 2021-679, Australian National University, College of Business and Economics, School of Economics.
    3. Lee, Jaesun & Shapiro, Dmitry, 2023. "Quality communication via cheap-talk messages in experimental auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 74-107.

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    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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