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Market Thickness, Prices and Honesty: A Quality Demand Trap

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  • Siddhartha Bandyopadhyay

Abstract

We analyze how product quality, prices and demand interact in a dynamic model of asymmetric information. We show that in markets for experience goods, even in the absence of certification, trade may occur, arising from a relation between market thickness and the incentive of sellers to produce high quality. We characterize the equilibrium prices, which depend on the distribution of buyer valuations. Finally, we show that the relationship between market thickness and incentive to produce high quality goods exists up to a certain threshold level of demand.

Suggested Citation

  • Siddhartha Bandyopadhyay, 2012. "Market Thickness, Prices and Honesty: A Quality Demand Trap," Discussion Papers 12-06, Department of Economics, University of Birmingham.
  • Handle: RePEc:bir:birmec:12-06
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    More about this item

    Keywords

    Market Thickness; Endogenous Quality; Multiple Equilibria; Price Mechanism;

    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, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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