Competition and Efficiency in Markets with Quality Uncertainty
AbstractThis paper addresses the following question: Does competition enhance efficiency in markets with quality uncertainty? Using the mechanism design methodology, we characterize the maximal achievable level of efficiency in such markets, and then use this characterization to analyze how maximal efficiency varies with the degree of market competition. We show that the relationship between them is in general a non-trivial function of the main market parameters. In particular we show: (i) for some set of parameter values maximal efficiency is strictly increasing in the degree of market competition (although it never attains the first-best), but only until competition is sufficiently intense; thereafter, maximal efficiency is strictly decreasing in the degree of competition; (ii) for some set of parameter values maximal efficiency is strictly decreasing in the degree of market competition, attaining the first-best when there is no competition; and (iii) for some set of parameter values maximal efficiency is strictly increasing in the degree of market competition, attains the first-best once competition is sufficiently intense, and then remains at the first-best thereafter.
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Bibliographic InfoPaper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 593.
Date of creation: 07 Mar 2005
Date of revision:
Postal: Discussion Papers Administrator, Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, U.K.
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