Endogenous Market Thickness and Honesty : A Quality Trap Model
AbstractMany emerging or transition economies lack institutional arrangements (like ISO certification) to credibly signal product quality. The absence of such institutions leads to low levels of market activity with poor quality products on sale. In this paper, we use a dynamic framework with asymmetric information to model this phenomenon. Sellers choose the quality they produce and face a trade-off between producing a high quality product, which gives low one period returns but leads to higher future profits, and a low quality product, which gives higher one period returns but bars the seller from future market activity. Sellers' differ in how they discount the future and thus in how they evaluate this trade-off. Demand is endogenous and the number of buyers that enter the market depends on the quality of the products they expect to find. Market thickness (the buyer-seller ratio), product quality, prices and the distribution of seller types are all endogenously determined and multiple steady states may emerge. In general, a sufficient number of sellers need to be patient for multiple steady states to exist. Technology that involves 'learning by doing' may cause market segregation. Importantly, sellers' expectations about market thickness matter in determining the quality only if sellers believe that market thickness will be less than one.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Industrial Organization with number 0408006.
Length: 35 pages
Date of creation: 25 Aug 2004
Date of revision:
Note: Type of Document - pdf; pages: 35. pdf file, 35 pages
Contact details of provider:
Web page: http://126.96.36.199
market thickness; endogenous quality; multiple equilibria; price mechanism.;
Find related papers by JEL classification:
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-31 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September.
- Banerjee, Abhijit V & Newman, Andrew F, 1993.
"Occupational Choice and the Process of Development,"
Journal of Political Economy,
University of Chicago Press, vol. 101(2), pages 274-98, April.
- Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989.
"Industrialization and the Big Push,"
Journal of Political Economy,
University of Chicago Press, vol. 97(5), pages 1003-26, October.
- Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1988. "Industrialization and the Big Push," NBER Working Papers 2708, National Bureau of Economic Research, Inc.
- Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989. "Industrialization and the Big Push," Scholarly Articles 3606235, Harvard University Department of Economics.
- Greif, Avner & Milgrom, Paul & Weingast, Barry R, 1994. "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 745-76, August.
- Grossman, Gene M & Horn, Henrik, 1988.
"Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry,"
The Quarterly Journal of Economics,
MIT Press, vol. 103(4), pages 767-87, November.
- Gene M. Grossman & Henrik Horn, 1989. "Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry," NBER Working Papers 2159, National Bureau of Economic Research, Inc.
- 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.
- John McLaren, 2000.
""Globalization" and Vertical Structure,"
American Economic Review,
American Economic Association, vol. 90(5), pages 1239-1254, December.
- Basu, Kaushik, 1986. "One Kind of Power," Oxford Economic Papers, Oxford University Press, vol. 38(2), pages 259-82, July.
- Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
- Igal Hendel & Alessandro Lizzeri, 1997.
"Adverse Selection in Durable Goods Markets,"
NBER Working Papers
6194, National Bureau of Economic Research, Inc.
- Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
- Adsera, Alicia & Ray, Debraj, 1998. " History and Coordination Failure," Journal of Economic Growth, Springer, vol. 3(3), pages 267-76, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.