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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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File URL: http://hdl.handle.net/10.1111/j.0002-9092.2004.00607.x
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Bibliographic Info

Article provided by Agricultural and Applied Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 86 (2004)
Issue (Month): 3 ()
Pages: 649-659

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Handle: RePEc:oup:ajagec:v:86:y:2004:i:3:p:649-659

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Cited by:
  1. 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.
  2. Giovanni Mastrobuoni & Franco Peracchi & Aleksey Tetenov, 2012. "Price as a signal of product quality: Some experimental evidence," EIEF Working Papers Series 1214, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2012.
  3. 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.
  4. Chengyan Yue & Stéphan Marette & John C. Beghin, 2006. "How to Promote Quality Perception in Wine Markets: Brand Advertising or Geographical Indication?," Center for Agricultural and Rural Development (CARD) Publications 06-wp426, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  5. 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.
  6. Tauber, Ramona & Anders, Sven & Langinier, Corinne, 2011. "The Economics of Geographical Indications: Welfare Implications," Working Papers 103262, Structure and Performance of Agriculture and Agri-products Industry (SPAA).

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