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

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

1 and 1,2,*
Received: 17 November 2010; in revised form: 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.
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 which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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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.

AMA Style

Voorneveld M, Weibull JW. A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation. Games. 2011; 2(1):163-186.

Chicago/Turabian Style

Voorneveld, Mark; Weibull, Jörgen W. 2011. "A Scent of Lemon—Seller Meets Buyer with a Noisy Quality Observation." Games 2, no. 1: 163-186.

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