Endogenous market segmentation for lemons

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Abstract

Information asymmetry between sellers and buyers often prevents socially desirable trade. This article presents a new mechanism that mitigates the inefficiencies caused by information asymmetry. I consider decentralized markets under adverse selection and show that such markets can be endogenously segmented in a way that improves social welfare. Endogenous segmentation is driven by low-quality sellers' incentive to attract more buyers by separating from high-quality sellers. The mechanism helps us understand the roles of several real-world institutions, such as multiple marketplaces, costless advertisements, and nonbinding list prices.

Original languageEnglish (US)
Pages (from-to)562-576
Number of pages15
JournalRAND Journal of Economics
Volume43
Issue number3
DOIs
StatePublished - Sep 1 2012

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ASJC Scopus subject areas

  • Economics and Econometrics

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