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Price Signaling and Bargains in Markets with Partially Informed Populations

Author

Listed:
  • Mark Schneider

    (The University of Alabama, Culverhouse College of Business)

  • Daniel Graydon Stephenson

    (Virginia Commonwealth University and Economic Science Institute, Chapman University)

Abstract

Classical studies of asymmetric information focus on situations where only one side of a market is informed. This study experimentally investigates a more general case where some sellers are informed and some buyers are informed. We establish the existence of semiseparating perfect Bayesian equilibria where prices serve as informative signals of quality to uninformed buyers, while informed buyers can often leverage their informational advantage by purchasing high quality items from uninformed sellers at bargain prices. These models provide a rational foundation for the co-existence of bargains, price signaling, and Pareto efficiency in markets with asymmetric information. We test these theoretical predictions in a controlled laboratory experiment where agents repeatedly participate in markets with asymmetric information. We observe long run behavior consistent with equilibrium predictions of price signaling, bargains, and partial-pooling behavior.

Suggested Citation

  • Mark Schneider & Daniel Graydon Stephenson, 2019. "Price Signaling and Bargains in Markets with Partially Informed Populations," Working Papers 19-27, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:19-27
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/287/
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    More about this item

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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