Non-Exclusive Competition in the Market for Lemons
IDEI, Université de Toulouse I.; University of Roma II, Tor Vergata
University of Toulouse I
National Institute for Agricultural Research (INRA)
December 18, 2009
CEIS Working Paper No. 159
We consider an exchange economy in which a seller can trade an endowment of a divisible good whose quality she privately knows. Buyers compete in menus of non-exclusive contracts, so that the seller may choose to trade with several buyers. In this context, we show that an equilibrium always exists and that aggregate equilibrium allocations are generically unique. Although the good ordered by the seller is divisible, aggregate equilibrium allocations exhibit no fractional trades. In equilibrium, goods of relatively low quality are traded at the same price, while goods of higher quality may end up not being traded at all if the adverse selection problem is severe. This provides a novel strategic foundation for Akerlof's (1970) results, which contrasts with standard competitive screening models postulating enforceability of exclusive contracts. Latent contracts that are issued but not traded in equilibrium turn out to be an essential feature of our construction.
Number of Pages in PDF File: 71
Keywords: Adverse Selection, Competing Mechanisms, Non-Exclusivity
JEL Classification: D43, D82, D86
Date posted: December 18, 2009
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