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Competing Mechanisms in Markets for Lemons

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  • Sarah Auster
  • Piero Gottardi

Abstract

We study the competitive equilibria in a market with adverse selection and search frictions. Uninformed buyers post general direct mechanisms and informed sellers choose where to direct their search. We demonstrate that there exists a unique equilibrium allocation and characterize its properties: all buyers post the same mechanism and a low quality object is traded whenever such object is present in a meeting. Sellers are thus pooled at the search stage and screened at the mechanism stage. If adverse selection is sufficiently severe, this equilibrium is constrained inefficient. Furthermore, the properties of the equilibrium differ starkly from the case where meetings are restricted to be bilateral, in which case in equilibrium sellers sort themselves at the search stage across different mechanisms. Compared to such sorting equilibria, our equilibriumyields a higher surplus for most, but not all, parameter specifications.

Suggested Citation

  • Sarah Auster & Piero Gottardi, 2016. "Competing Mechanisms in Markets for Lemons," Working Papers 568, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:568
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    References listed on IDEAS

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    Cited by:

    1. Cai, Xiaoming & Gautier, Pieter A. & Wolthoff, Ronald P., 2017. "Search frictions, competing mechanisms and optimal market segmentation," Journal of Economic Theory, Elsevier, vol. 169(C), pages 453-473.
    2. Cai, Xiaoming & Gautier, Pieter A. & Wolthoff, Ronald P., 2017. "Search frictions, competing mechanisms and optimal market segmentation," Journal of Economic Theory, Elsevier, vol. 169(C), pages 453-473.
    3. Attar, Andrea & Campioni, Eloisa & Piaser, Gwenaël, 2018. "On competing mechanisms under exclusive competition," Games and Economic Behavior, Elsevier, vol. 111(C), pages 1-15.

    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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