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Quality Undersupply and Oversupply

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Abstract

I analyze a market in which a price-taking buyer buys a variable-quality good from a population of sellers, contrasting the case where quality is a seller's private information to that where it is public information. Average quality traded under private information can be either higher (quality oversupply) or lower (quality undersupply) than under public information, depending on sellers' preferences. We are likely to see quality undersupply if (i) sellers' preferences exhibit substitutability between the variable-quality good and the numéraire good, and/or (ii) sellers view the numéraire good as a luxury good relative to the variable-quality good. Reverse arguments hold for quality oversupply. J'analyse un marché dans lequel un acheteur achète un bien de qualité variable d'une population de vendeurs. Je compare deux cas, celui où la qualité est connue des vendeurs seulement (information privée) et celui où la qualité est connue publiquement (information publique). La qualité moyenne vendue sur le marché avec information privée peut être supérieure ou inférieure à la qualité moyenne vendue sur le marché avec information publique, selon les préférences des vendeurs. Elle aura tendance à être supérieure si (i) les préférences des vendeurs manifestent une substituabilité entre le bien à qualité variable et le bien numéraire, et/ou (ii) les vendeurs considèrent le bien numéraire comme un bien de luxe par rapport au bien à qualité variable.

Suggested Citation

  • Max Blouin, 2000. "Quality Undersupply and Oversupply," Cahiers de recherche CREFE / CREFE Working Papers 113, CREFE, Université du Québec à Montréal.
  • Handle: RePEc:cre:crefwp:113
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    References listed on IDEAS

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    1. Douglas Gale, 1992. "A Walrasian Theory of Markets with Adverse Selection," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 229-255.
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    5. Kim, Jae-Cheol, 1985. "The Market for "Lemons" Reconsidered: A Model of the Used Car Market with Asymmetric Information," American Economic Review, American Economic Association, vol. 75(4), pages 836-843, September.
    6. Douglas Gale, 1996. "Equilibria and Pareto optima of markets with adverse selection (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 207-235.
    7. Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February.
    8. Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December.
    9. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
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    11. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
    12. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    13. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
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    More about this item

    Keywords

    adverse selection; income effect; substitution effect;

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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