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Prices and quality signals

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Author Info

  • Voorneveld, Mark

    ()
    (Dept. of Economics, Stockholm School of Economics)

  • Weibull, Jörgen W.

    ()
    (Department of Economics)

Abstract

We consider a market-for-lemons model where the seller is a price setter, and, in addition to observing the price, the buyer receives a private noisy signal of the product's quality, such as when a prospective buyer looks at a car or house for sale, or when an employer interviews a job candidate. Sufficient conditions are given for the existence of perfect Bayesian equilibria, and we analyze equilibrium prices, trading probabilities and gains of trade. In particular, we identify separating equilibria with partial and full adverse selection as well as pooling equilibria. We also study the role of the buyer's signal precision, from being completely uninformative (as in standard adverse-selection models) to being completely informative (as under symmetric information). The robustness of results for these two boundary cases is analyzed, and comparisons are made with established models of monopoly and perfect competition.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 551.

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Length: 33 pages
Date of creation: 12 Feb 2004
Date of revision: 08 Mar 2004
Handle: RePEc:hhs:hastef:0551

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Related research

Keywords: lemons; noisy quality signal; adverse selection;

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References

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  1. Hellwig,Martin, 1986. "Some recent developments in the theory of competition in markets with adverse selection," Discussion Paper Serie A 82, University of Bonn, Germany.
  2. Hans Jørgen Jacobsen & Mogens Jensen & Birgitte Sloth, 1998. "Evolutionary Learning in Signalling Games," CIE Discussion Papers 1999-14, University of Copenhagen. Department of Economics. Centre for Industrial Economics, revised Sep 1999.
  3. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  4. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  5. John G. Riley, 1976. "Informational Equilibrium," UCLA Economics Working Papers 071, UCLA Department of Economics.
  6. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March.
  7. 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.
  8. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
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Citations

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Cited by:
  1. Silvia Martínez-Gorricho, 2012. "Beneficial consumer fraud," Working Papers. Serie AD 2012-13, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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