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Competitive search markets for durable goods

Competitive search markets for durable goods This paper considers a dynamic version of Akerlof's (1970) lemons problem where buyers and sellers must engage in search to find a trading partner. We show that if goods are durable, the market itself may provide a natural sorting mechanism. In equilibrium, high-quality goods sell at a higher price than low-quality goods but also circulate longer. This accords with the common wisdom that sellers who want to sell fast may have to accept a lower price. We then compare the equilibrium outcomes under private information with those under complete information. Surprisingly, we find that for a large range of parameter values the quilibrium outcomes under the two information regimes coincide, despite the fact that circulation time is used to achieve separation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economic Theory Springer Journals

Competitive search markets for durable goods

Inderst, Roman; Müller, Holger M.
Economic Theory , Volume 19 (3) – Apr 1, 2002
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References (29)

Publisher
Springer Journals
Copyright
Copyright © 2002 by Springer-Verlag Berlin Heidelberg
Subject
Legacy
ISSN
0938-2259
eISSN
1432-0479
DOI
10.1007/s001990000162
Publisher site
See Article on Publisher Site

Abstract

This paper considers a dynamic version of Akerlof's (1970) lemons problem where buyers and sellers must engage in search to find a trading partner. We show that if goods are durable, the market itself may provide a natural sorting mechanism. In equilibrium, high-quality goods sell at a higher price than low-quality goods but also circulate longer. This accords with the common wisdom that sellers who want to sell fast may have to accept a lower price. We then compare the equilibrium outcomes under private information with those under complete information. Surprisingly, we find that for a large range of parameter values the quilibrium outcomes under the two information regimes coincide, despite the fact that circulation time is used to achieve separation.

Journal

Economic Theory – Springer Journals

Published: Apr 1, 2002

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