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Imperfect Competition and Efficiency in Lemons Markets

Author

Listed:
  • Abhinay Muthoo
  • 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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Suggested Citation

  • Abhinay Muthoo & Suresh Mutuswami, 2011. "Imperfect Competition and Efficiency in Lemons Markets," Economic Journal, Royal Economic Society, vol. 121(552), pages 580-594, May.
    • Handle: RePEc:ecj:econjl:v:121:y:2011:i:552:p:580-594
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    Cited by:

    1. Yuk Ying Chang & Martin Young, 2015. "Dissipative Competition: Evidence from a Quasi-Natural Experiment," International Review of Finance, International Review of Finance Ltd., vol. 15(2), pages 169-198, June.
    2. Klaus Kultti & Eeva Mauring & Juuso Vanhala & Timo Vesala, 2015. "Adverse Selection In Dynamic Matching Markets," Bulletin of Economic Research, Wiley Blackwell, vol. 67(2), pages 115-133, April.

    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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