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Market Thickness, Prices and Honesty: A Quality Demand Trap

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  • Siddhartha Bandyopadhyay

Abstract

We analyze how product quality, prices and demand interact in a dynamic model of asymmetric information. We show that in markets for experience goods, even in the absence of certification, trade may occur, arising from a relation between market thickness and the incentive of sellers to produce high quality. We characterize the equilibrium prices, which depend on the distribution of buyer valuations. Finally, we show that the relationship between market thickness and incentive to produce high quality goods exists up to a certain threshold level of demand.

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File URL: ftp://ftp.bham.ac.uk/pub/RePEc/pdf/12-06.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 12-06.

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Length: 40 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:bir:birmec:12-06

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Postal: Edgbaston, Birmingham, B15 2TT
Web page: http://www.economics.bham.ac.uk
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Keywords: Market Thickness; Endogenous Quality; Multiple Equilibria; Price Mechanism;

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