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Non-Exclusive Competition in the Market for Lemons

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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 Tor Vergata University, CEIS in its series CEIS Research Paper with number 159.

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Length: 71 pages
Date of creation: 28 May 2010
Date of revision: 28 May 2010
Handle: RePEc:rtv:ceisrp:159

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Keywords: Adverse Selection; Competing Mechanisms; Non-Exclusivity;

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Citations

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Cited by:
  1. 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.
  2. Salvatore Piccolo & Giovanni W. Puopolo & Luis Vasconcelos, 2013. "Non-Exclusive Financial Advice," CSEF Working Papers 347, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Ghosh, Sambuddha & Han, Seungjin, 2012. "Repeated Contracting in Decentralised Markets," Microeconomics.ca working papers seungjin_han-2012-12, Vancouver School of Economics, revised 02 May 2013.
  4. Philip Bond & Yaron Leitner, 2012. "Market run-ups, market freezes, inventories, and leverage," Working Papers 12-8, Federal Reserve Bank of Philadelphia.
  5. Han, Seungjin, 2014. "Implicit collusion in non-exclusive contracting under adverse selection," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 85-95.
  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. Siegert, Caspar, 2014. "Optimal Opacity on Financial Markets," Discussion Papers in Economics 20937, University of Munich, Department of Economics.
  8. Gwenaël Piaser, 2014. "Common Agency Games with Common Value Exclusion, Convexity and Existence," Working Papers 2014-420, Department of Research, Ipag Business School.
  9. 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.
  10. 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.
  11. 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.
  12. Mariotti, Thomas & Salanié, François & Attar, Andrea, 2014. "Nonexclusive competition under adverse selection," Theoretical Economics, Econometric Society, vol. 9(1), January.

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