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Adverse Selection and Market Substitution by Electronic Trade

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Author Info

  • Oliver Fabel
  • Erik Lehmann

Abstract

Adverse selection induces economic limits to market substitution. If quality uncertainty persists in both Internet and traditional marketplaces, a second-best equilibrium with parallel market segments may arise. The information cost advantage of one marketplace is exactly offset by a more severe adverse selection problem associated with non-observable quality variables. The electronic marketplace providing dominant search means contains all segments, while the traditional market may lack some segments. These missing segments are characterized by low quality expectations given the set of advertised quality signals. The analytic results are confirmed by an empirical investigation of used-car trade. Thus the study also provides an estimate of the price differential between the electronic and the traditional marketplace.

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File URL: http://www.tandfonline.com/10.1080/13571510210134646
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 9 (2002)
Issue (Month): 2 ()
Pages: 175-193

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Handle: RePEc:taf:ijecbs:v:9:y:2002:i:2:p:175-193

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Related research

Keywords: E-COMMERCE; Market Substitution; Adverse Selection; Efficient Search And Learning;

References

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  1. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  2. Kirby, Alison J., 1993. "Optimal information exchange," Information Economics and Policy, Elsevier, vol. 5(1), pages 5-29, January.
  3. J. Yannis Bakos, 1997. "Reducing Buyer Search Costs: Implications for Electronic Marketplaces," Management Science, INFORMS, vol. 43(12), pages 1676-1692, December.
  4. Bond, Eric W, 1982. "A Direct Test of the "Lemons" Model: The Market for Used Pickup Trucks," American Economic Review, American Economic Association, vol. 72(4), pages 836-40, September.
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Cited by:
  1. Rach, Sabine & Tschöpel, Michael, 2011. "Handelsplattformen im Internet: Eine Literaturstudie zur empirischen Evidenz," Arbeitspapiere 112, Westfälsche Wilhelms-Universität Münster (WWU), Institut für Genossenschaftswesen.
  2. Erik Lehmann, 2003. "Pricing Behavior on the WEB: Evidence from Online Travel Agencies," Empirica, Springer, vol. 30(4), pages 379-396, December.
  3. Fabel, Oliver, 2001. "The emergence of a new economy: An O-Ring approach," Discussion Papers, Series 1 314, University of Konstanz, Department of Economics.

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