A scent of lemon-seller meets buyer with a noisy quality observation

We consider a market for lemons in which the seller is a monopolistic price setter and the buyer receives a private noisy signal of the product's quality. We model this as a game and analyze perfect Bayesian equilibrium prices, trading probabilities and gains of trade. In particular, we vary th...

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Bibliographic Details
Published in:Games 2011-03, Vol.2 (1), p.163-186
Main Authors: Voorneveld, Mark, Weibull, Jörgen W
Format: Article
Language:English
Subjects:
Adverse selection
Consumers
Economics
Employers
Equilibrium
lemons
noisy quality signals
Prices
Probability
Purchasing
two-sided incomplete information
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Summary:We consider a market for lemons in which the seller is a monopolistic price setter and the buyer receives a private noisy signal of the product's quality. We model this as a game and analyze perfect Bayesian equilibrium prices, trading probabilities and gains of trade. In particular, we vary the buyer's signal precision, from being completely uninformative, as in standard models of lemons markets, to being perfectly informative. We show that high quality units are sold with positive probability even in the limit of uninformative signals, and we identify some discontinuities in the equilibrium predictions at the boundaries of completely uninformative and completely informative signals, respectively.
ISSN:2073-4336
2073-4336
DOI:10.3390/g2010163