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 the buy...

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Bibliographic Details
Main Authors:	Jörgen W. Weibull, Mark Voorneveld
Format:	Article
Language:	English
Published:	MDPI AG 2011-03-01
Series:	Games
Subjects:	lemons adverse selection noisy quality signals two-sided incomplete information
Online Access:	http://www.mdpi.com/2073-4336/2/1/163/

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spelling	doaj-eb2eb6e881654cb2aa84177519c7dc812020-11-25T02:28:54ZengMDPI AGGames2073-43362011-03-012116318610.3390/g2010163A Scent of Lemon—Seller Meets Buyer with a Noisy Quality ObservationJörgen W. WeibullMark VoorneveldWe 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. http://www.mdpi.com/2073-4336/2/1/163/lemonsadverse selectionnoisy quality signalstwo-sided incomplete information
collection	DOAJ
language	English
format	Article
sources	DOAJ
author	Jörgen W. Weibull Mark Voorneveld
spellingShingle	Jörgen W. Weibull Mark Voorneveld A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation Games lemons adverse selection noisy quality signals two-sided incomplete information
author_facet	Jörgen W. Weibull Mark Voorneveld
author_sort	Jörgen W. Weibull
title	A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation
title_short	A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation
title_full	A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation
title_fullStr	A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation
title_full_unstemmed	A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation
title_sort	scent of lemon—seller meets buyer with a noisy quality observation
publisher	MDPI AG
series	Games
issn	2073-4336
publishDate	2011-03-01
description	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.
topic	lemons adverse selection noisy quality signals two-sided incomplete information
url	http://www.mdpi.com/2073-4336/2/1/163/
work_keys_str_mv	AT jorgenwweibull ascentoflemonsellermeetsbuyerwithanoisyqualityobservation AT markvoorneveld ascentoflemonsellermeetsbuyerwithanoisyqualityobservation AT jorgenwweibull scentoflemonsellermeetsbuyerwithanoisyqualityobservation AT markvoorneveld scentoflemonsellermeetsbuyerwithanoisyqualityobservation
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A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation

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