On Bilateral Trade with Interdependent Values

33 Pages Posted: 27 Oct 2021 Last revised: 28 Jun 2023

See all articles by Teemu Pekkarinen

Teemu Pekkarinen

Massachusetts Institute of Technology (MIT)

Date Written: June 28, 2023

Abstract

We study a market for 'lemons' from the perspective of mechanism design in a bilateral trade setup. The closed-form solution for the seller-optimal safe mechanism under one-sided private information is provided. We show that a seller can disclose the quality of the goods by controlling the supply of her goods; high-quality sellers want their goods to be scarce and expensive and low-quality sellers abundant and cheap. In this way, sellers can differentiate their products from each other and maximize their payoffs. We extend this model to two-sided private information and give a novel characterization of the seller-optimal safe mechanism in this setup. It turns out that if there is two-sided asymmetric information, then the seller finds it optimal to engage in price signalling instead of quantity signaling. This is the least-cost way for the seller to signal her private information to the buyer.

Keywords: Informed Principal, Bilateral Trade, Mechanism Design, Interdependent Values

JEL Classification: D42, D82

Suggested Citation

Pekkarinen, Teemu, On Bilateral Trade with Interdependent Values (June 28, 2023). Available at SSRN: https://ssrn.com/abstract=3950363 or http://dx.doi.org/10.2139/ssrn.3950363

Teemu Pekkarinen (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

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HOME PAGE: http://www.teemupekkarinen.com

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