Few bad apples or plenty of lemons: which makes it harder to market plums?

TitleFew bad apples or plenty of lemons: which makes it harder to market plums?
Publication TypeWorking Paper
Year of Publication2004
AuthorsF. Adriani, LG. Deidda
Number2004_13
Keywordsadverse selection, d1, market for lemons, off-equilibrium, price-setting
Abstract

We analyse a competitive commodity market with a large number of buyers and sellers where: a. Individual qualities, either high or low, are not observable by buyers; b. Sellers strategically announce prices and buyers decide whether to buy having observed sellers’ actions. We find that the set of robust equilibria includes only fully separating equilibria. In any robust equilibrium the low quality is always traded. The high quality is traded if demand is sufficiently strong, so that low quality sellers are unable to satisfy all buyers, and is never traded otherwise. Hence, few rotten apples is better than a plentiful of lemons for plums’ sellers.

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