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Games 2011, 2(1), 163-186; doi:10.3390/g2010163

A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation

1
Department of Economics, Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden
2
Department of Economics, École Polytechnique, 91 128 Palaiseau Cedex, France
*
Author to whom correspondence should be addressed.
Received: 17 November 2010 / Revised: 8 February 2011 / Accepted: 14 March 2011 / Published: 18 March 2011
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Abstract

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. View Full-Text
Keywords: lemons; adverse selection; noisy quality signals; two-sided incomplete information lemons; adverse selection; noisy quality signals; two-sided incomplete information
This is an open access article distributed under the Creative Commons Attribution License (CC BY 3.0).

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MDPI and ACS Style

Voorneveld, M.; Weibull, J.W. A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation. Games 2011, 2, 163-186.

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