The Monopolist’s Blues
We consider the problem of trade between a price setting party who has private information about the quality of a good and a price taker who may also have private information. We restrict attention to the case in which, under full information, it is efficient to trade only a subset of all qualities. In particular, we assume that trading a low (high) quality is inefficient when the seller (buyer) sets the price. We show that there is a unique equilibrium outcome passing Cho and Kreps (1987) “Never a Weak Best Response”. The refined outcome is always characterized by no trade, although trade would be mutually beneficial in some state of nature. This occurs - 1. Even if the price taker has more precise information than the price setting party, and 2. Even when the information received by both parties is almost perfect. Both results imply that there are inefficiencies due to price setting that are not present in standard markets with adverse selection. We find that the price setting party can always increase her profits through ex-ante delegation of the price choice to an uninformed third party. We discuss applications to professional bodies and the market for unskilled labor.
|Date of creation:||2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.crenos.unica.it/
More information through EDIRC
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.:
- 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.
- Milgrom, Paul & Roberts, John, 1986.
"Price and Advertising Signals of Product Quality,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 796-821, August.
- Marco Ottaviani, 2000.
"The Value of Public Information in Monopoly,"
Econometric Society World Congress 2000 Contributed Papers
1479, Econometric Society.
- E. Kohlberg & J.-F. Mertens, 1998.
"On the Strategic Stability of Equilibria,"
Levine's Working Paper Archive
445, David K. Levine.
- Banks, Jeffrey S. & Sobel, Joel., 1985.
"Equilibrium Selection in Signaling Games,"
565, California Institute of Technology, Division of the Humanities and Social Sciences.
- Kyle Bagwell & Michael Riordan, 1988.
"High and Declining Prices Signal Product Quality,"
808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Ellingsen, Tore, 1997. "Price signals quality: The case of perfectly inelastic demand," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 43-61, November.
- Kessler, Anke S, 2001.
"Revisiting the Lemons Market,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 25-41, February.
- Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
- Cho, In-Koo & Sobel, Joel, 1990. "Strategic stability and uniqueness in signaling games," Journal of Economic Theory, Elsevier, vol. 50(2), pages 381-413, April.
- Kyle Bagwell, 1990.
"Optimal Export Policy for a New-Product Monopoly,"
898, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Jonathan Levin, 2001.
"Information and the Market for Lemons,"
01004, Stanford University, Department of Economics.
- Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
- Roland Bénabou & Jean Tirole, 2003.
"Intrinsic and Extrinsic Motivation,"
Review of Economic Studies,
Oxford University Press, vol. 70(3), pages 489-520.
- Laffont, Jean-Jacques & Maskin, Eric, 1987. "Monopoly with asymmetric information about quality : Behavior and regulation," European Economic Review, Elsevier, vol. 31(1-2), pages 483-489.
- Overgaard, Per Baltzer, 1993. "Price as a signal of quality : A discussion of equilibrium concepts in signalling games," European Journal of Political Economy, Elsevier, vol. 9(4), pages 483-504, November.
- Shinnick, Edward & Stephen, Frank H., 2000. "Professional cartels and scale fees: chiselling on the celtic fringe?," International Review of Law and Economics, Elsevier, vol. 20(4), pages 407-423, December.
When requesting a correction, please mention this item's handle: RePEc:cns:cnscwp:200611. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Antonello Pau)
If references are entirely missing, you can add them using this form.