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Non-Exclusive Competition in the Market for Lemons

71 Pages Posted: 18 Dec 2009  

Andrea Attar

University of Roma Tor Vergata; Toulouse School of Economics

Thomas Mariotti

University of Toulouse I

Francois Salanie

National Institute for Agricultural Research (INRA); University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: December 18, 2009

Abstract

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.

Keywords: Adverse Selection, Competing Mechanisms, Non-Exclusivity

JEL Classification: D43, D82, D86

Suggested Citation

Attar, Andrea and Mariotti , Thomas and Salanie, Francois, Non-Exclusive Competition in the Market for Lemons (December 18, 2009). CEIS Working Paper No. 159. Available at SSRN: https://ssrn.com/abstract=1525465 or http://dx.doi.org/10.2139/ssrn.1525465

Andrea Attar (Contact Author)

University of Roma Tor Vergata ( email )

2 Via Columbia
00100 Rome
Italy

Toulouse School of Economics

21, allée de Brienne
Toulouse, F 31000
France
+33 5 61128578 (Phone)

Thomas Mariotti

University of Toulouse I ( email )

Toulouse, 31000
France

Francois Salanie

National Institute for Agricultural Research (INRA) ( email )

21, Allee de Brienne
31000 Toulouse
France

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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