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Influence of Informed Buyers in Markets Susceptible to the Lemons Problem

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  • Philippe Mahenc

Abstract

It is shown that the presence of informed buyers is necessary but not always sufficient for producers to use prices as signals of product quality. A sufficiently high fraction of informed buyers eliminates the lemons problem. A small fraction of informed buyers mitigates the lemons problem, provided that buyers' prior belief of high quality is sufficiently pessimistic: price reveals high quality at a signaling cost which increases with market power. However, if buyers' prior belief of high quality is optimistic when the market is poorly informed, then the lemons problem is not overcome. Copyright 2004, Oxford University Press.

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  • Philippe Mahenc, 2004. "Influence of Informed Buyers in Markets Susceptible to the Lemons Problem," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(3), pages 649-659.
    • Handle: RePEc:oup:ajagec:v:86:y:2004:i:3:p:649-659
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    File URL: http://hdl.handle.net/10.1111/j.0002-9092.2004.00607.x
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    Cited by:

    1. Villas-Boas, Sofia B, 2020. "Reduced Form Evidence on Belief Updating Under Asymmetric Information," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt08c456vk, Department of Agricultural & Resource Economics, UC Berkeley.
    2. Dubois, Pierre & Nauges, Céline, 2010. "Identifying the effect of unobserved quality and expert reviews in the pricing of experience goods: Empirical application on Bordeaux wine," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 205-212, May.
    3. Yue, Chengyan & Marette, Stephan & Beghin, John C., 2006. "How to Promote Quality Perception in Wine Markets: Brand Advertising or Geographic Indication?," 2006 Annual meeting, July 23-26, Long Beach, CA 21310, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Bonnet, Céline & Hilger, James & Villas-Boas, Sofia B., 2017. "Reduced Form Evidence on Belief Updating under Asymmetric Information - The Case of Wine Expert Opinions," TSE Working Papers 17-834, Toulouse School of Economics (TSE), revised May 2019.
    5. Mastrobuoni, Giovanni & Peracchi, Franco & Tetenov, Aleksey, 2014. "Price as a Signal of Product Quality: Some Experimental Evidence," Journal of Wine Economics, Cambridge University Press, vol. 9(2), pages 135-152, August.
    6. Gill, David & Sgroi, Daniel, 2008. "The Optimal Choice of Pre-launch Reviewer : How Best to Transmit Information using Tests and Conditional Pricing," The Warwick Economics Research Paper Series (TWERPS) 877, University of Warwick, Department of Economics.
    7. Tauber, Ramona & Anders, Sven M. & Langinier, Corinne, 2011. "The Economics of Geographical Indications: Welfare Implications," Working Papers 103262, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
    8. Alex Albright & Peter Pedroni & Stephen Sheppard, 2018. "Uncorking Expert Reviews with Social Media: A Case Study Served with Wine," Department of Economics Working Papers 2018-03, Department of Economics, Williams College.
    9. Teuber, Ramona, 2011. "Protecting Geographical Indications: Lessons learned from the Economic Literature," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 116081, European Association of Agricultural Economists.

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