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Imperfect Competition and Efficiency in Lemons Markets

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  • Abhinay Muthoo

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  • Suresh Mutuswami

Abstract

This paper studies the impact of competition on the degree of inefficiency in lemons markets. More precisely, we characterize the second-best mechanism (i.e., the optimal mechanism with private information) in a stylized lemons market with finite numbers of buyers and sellers. We then study the relationship between the degree of efficiency of the second-best mechanism and market competitiveness. The relationship between the first-best and second best mechanisms is also explored.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 631.

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Date of creation: 26 Jun 2007
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Handle: RePEc:esx:essedp:631

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  1. Thomas A. Gresik & Mark A. Satterthwaite, 1985. "The Rate at Which a Simple Market Becomes Efficient as the Number of Traders Increases: An Asymptotic Result for Optimal Trading Mechanisms," Discussion Papers 641, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Evans, Robert, 1989. "Sequential Bargaining with Correlated Values," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 499-510, October.
  3. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1089-1118, October.
  4. Maarten C. W. Janssen & Santanu Roy, 2002. "Dynamic Trading in a Durable Good Market with Asymmetric Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 257-282, February.
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