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Non-Exclusive Competition in the Market for Lemons

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  • Andrea Attar
  • Thomas Mariotti
  • Francois Salanie

Abstract

We consider an exchange economy in which a seller can trade an endowment of a divisible good whose quality she privately knows. Buyers compete in menus of non-exclusive contracts, so that the seller may choose to trade with several buyers. In this context, we show that an equilibrium always exists and that aggregate equilibrium allocations are generically unique. Although the good offered by the seller is divisible, aggregate equilibrium allocations exhibit no fractional trades. In equilibrium, goods of relatively low quality are traded at the same price, while goods of higher quality may end up not being traded at all if the adverse selection problem is severe. This provides a novel strategic foundation for Akerlof’s (1970) results, which contrasts with standard competitive screening models postulating enforceability of exclusive contracts. Latent contracts that are issued but not traded in equilibrium turn out to be an essential feature of our construction.

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Paper provided by LERNA, University of Toulouse in its series LERNA Working Papers with number 09.13.289.

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Date of creation: May 2009
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Handle: RePEc:ler:wpaper:09.13.289

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Citations

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Cited by:
  1. Philip Bond & Yaron Leitner, 2012. "Market run-ups, market freezes, inventories, and leverage," Working Papers 12-8, Federal Reserve Bank of Philadelphia.
  2. Kosfeld, Michael & Von Siemens, Ferdinand, 2014. "Team Production in Competitive Labor Markets with Adverse Selection," CEPR Discussion Papers 9833, C.E.P.R. Discussion Papers.
  3. Gwenaël Piaser, 2014. "Common Agency Games with Common Value Exclusion, Convexity and Existence," Working Papers 2014-420, Department of Research, Ipag Business School.
  4. Siegert, Caspar, 2014. "Optimal Opacity on Financial Markets," Discussion Papers in Economics 20937, University of Munich, Department of Economics.
  5. Mariotti, Thomas & Salanié, François & Attar, Andrea, 2014. "Nonexclusive competition under adverse selection," Theoretical Economics, Econometric Society, vol. 9(1), January.
  6. Philip Bond & Yaron Leitner, 2013. "Market run-ups, market freezes, inventories, and leverage," Working Papers 13-14, Federal Reserve Bank of Philadelphia, revised 04 Feb 2014.
  7. Attar, Andrea & Campioni, Eloisa & Piaser, Gwenaël, 2013. "Two-sided communication in competing mechanism games," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 62-70.
  8. Han, Seungjin, 2011. "Implicit Collusion in Non-Exclusive Contracting under Adverse Selection," Microeconomics.ca working papers, Vancouver School of Economics seungjin_han-2011-10, Vancouver School of Economics, revised 02 Apr 2013.
  9. Salvatore Piccolo & Giovanni W. Puopolo & Luis Vasconcelos, 2013. "Non-Exclusive Financial Advice," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 347, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  10. Andrea Attar & Eloisa Campioni & Gwenael Piaser, 2011. "Information Revelation in Competing Mechanism Games," CEIS Research Paper 205, Tor Vergata University, CEIS, revised 04 Jul 2011.
  11. Sambuddha Ghosh & Seungjin Han, 2012. "Repeated Contracting in Decentralised Markets," Department of Economics Working Papers 2012-03, McMaster University, revised May 2013.
  12. Wanda Mimra & Achim Wambach, 2011. "A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection," CESifo Working Paper Series 3412, CESifo Group Munich.

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