IDEAS home Printed from https://ideas.repec.org/a/eee/gamebe/v128y2021icp160-181.html
   My bibliography  Save this article

Bargains, price signaling, and efficiency in markets with asymmetric information

Author

Listed:
  • Schneider, Mark
  • Stephenson, Daniel Graydon

Abstract

We experimentally investigate bargains, price signaling, and efficiency in markets with asymmetric information where some buyers are informed and some sellers are informed. We show that all perfect Bayesian equilibria where transactions occur under known gains from trade fall into one of two categories. In some cases, uninformed sellers charge high prices but uninformed buyers are only willing to pay low prices. Otherwise, uninformed sellers charge low prices and uninformed buyers are willing to pay high prices. This latter case is shown to exhibit more bargains and greater efficiency. Consistent with equilibrium predictions, we observe significantly fewer transactions and bargains in our first treatment. In contrast to equilibrium predictions, uninformed buyers selected far lower reservation prices than informed high quality buyers in the second treatment as predicted by adaptive models.

Suggested Citation

  • Schneider, Mark & Stephenson, Daniel Graydon, 2021. "Bargains, price signaling, and efficiency in markets with asymmetric information," Games and Economic Behavior, Elsevier, vol. 128(C), pages 160-181.
    • Handle: RePEc:eee:gamebe:v:128:y:2021:i:c:p:160-181
    DOI: 10.1016/j.geb.2021.04.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0899825621000385
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.geb.2021.04.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 493-510.
    2. Giuseppe Dari-Mattiacci & Sander Onderstal & Francesco Parisi, 2011. "Inverse Adverse Selection: The Market for Gems," Tinbergen Institute Discussion Papers 11-017/1, Tinbergen Institute.
    3. Stephenson, Daniel, 2019. "Coordination and evolutionary dynamics: When are evolutionary models reliable?," Games and Economic Behavior, Elsevier, vol. 113(C), pages 381-395.
    4. Veronica Guerrieri & Robert Shimer, 2014. "Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality," American Economic Review, American Economic Association, vol. 104(7), pages 1875-1908, July.
    5. Oprea, Ryan & Henwood, Keith & Friedman, Daniel, 2011. "Separating the Hawks from the Doves: Evidence from continuous time laboratory games," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2206-2225.
    6. Timothy N. Cason & Daniel Friedman & Ed Hopkins, 2021. "An Experimental Investigation of Price Dispersion and Cycles," Journal of Political Economy, University of Chicago Press, vol. 129(3), pages 789-841.
    7. Erica Myers & Steven L. Puller & Jeremy D. West, 2019. "Effects of Mandatory Energy Efficiency Disclosure in Housing Markets," NBER Working Papers 26436, National Bureau of Economic Research, Inc.
    8. Kessler, Anke S, 2001. "Revisiting the Lemons Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 25-41, February.
    9. Janssen, Maarten C.W. & Roy, Santanu, 2010. "Signaling quality through prices in an oligopoly," Games and Economic Behavior, Elsevier, vol. 68(1), pages 192-207, January.
    10. Russell Cooper & Thomas W. Ross, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(2), pages 197-207.
    11. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    12. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(4), pages 647-658.
    13. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    14. Yuk-Shee Chan & Hayne Leland, 1982. "Prices and Qualities in Markets with Costly Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(4), pages 499-516.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cao, Yu & Shao, Tong & Wan, Guangyu & Yi, Chaoqun, 2024. "Signaling green capability with wholesale price or certification," International Journal of Production Economics, Elsevier, vol. 268(C).
    2. Ying Gao & Xiangpei Hu & Qingkai Ji, 2022. "Quality signaling strategies of experience goods in online–offline channel integration," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(7), pages 2967-2981, October.
    3. Daniel Stephenson, 2022. "Assignment feedback in school choice mechanisms," Experimental Economics, Springer;Economic Science Association, vol. 25(5), pages 1467-1491, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dubovik, Andrei & Janssen, Maarten C.W., 2012. "Oligopolistic competition in price and quality," Games and Economic Behavior, Elsevier, vol. 75(1), pages 120-138.
    2. Moraga-Gonzalez, Jose Luis, 2000. "Quality uncertainty and informative advertising," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 615-640, May.
    3. Carlton, Dennis W. & Perloff, Jeffrey M., 1989. "The Economics of Information," Research Reports 25156, University of Connecticut, Food Marketing Policy Center.
    4. Albrecht, James & Lang, Harald & Vroman, Susan, 2002. "The effect of information on the well-being of the uninformed: what's the chance of getting a decent meal in an unfamiliar city?," International Journal of Industrial Organization, Elsevier, vol. 20(2), pages 139-162, February.
    5. Tahir Andrabi & Jishnu Das & Asim Ijaz Khwaja, 2017. "Report Cards: The Impact of Providing School and Child Test Scores on Educational Markets," American Economic Review, American Economic Association, vol. 107(6), pages 1535-1563, June.
    6. Ellingsen, Tore, 1997. "Price signals quality: The case of perfectly inelastic demand," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 43-61, November.
    7. Adriani, Fabrizio & Deidda, Luca G., 2011. "Competition and the signaling role of prices," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 412-425, July.
    8. Baomin Dong & Guixia Guo & Frank Yong Wang, 2021. "A signalling model of loss leader pricing strategy," Australian Economic Papers, Wiley Blackwell, vol. 60(2), pages 289-307, June.
    9. Michael Waldman, 1984. "The Role of Integrity in Economic Interaction," UCLA Economics Working Papers 350, UCLA Department of Economics.
    10. Ginger Jin & Andrew Kato, 2004. "Consumer frauds and the uninformed: Evidence from an online field experiment," Natural Field Experiments 00275, The Field Experiments Website.
    11. Erik Durbin, 2000. "McDonald's or the Michelin Guide? Revealing Quality Through Private-Sector Certification," Econometric Society World Congress 2000 Contributed Papers 1097, Econometric Society.
    12. Garcia, René, 1986. "La théorie économique de l’information : exposé synthétique de la littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 62(1), pages 88-109, mars.
    13. Philippe Mahenc & Alexandre Volle, 2021. "Price Signaling and Quality Monitoring in Markets for Credence Goods," CEE-M Working Papers hal-03098440, CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro.
    14. Alberto Cavaliere & Giovanni Crea, 2016. "Vertical Differentiation With Consumers Misperceptions And Information Disparities," DEM Working Papers Series 122, University of Pavia, Department of Economics and Management.
    15. Philippe Mahenc & Alexandre Volle, 2021. "Price Signaling and Quality Monitoring in Markets for Credence Goods," Working Papers hal-03098440, HAL.
    16. Adriani, Fabrizio & Deidda, Luca G., 2009. "Price signaling and the strategic benefits of price rigidities," Games and Economic Behavior, Elsevier, vol. 67(2), pages 335-350, November.
    17. Eric Rasmusen, 2008. "Quality-Ensuring Profits," Working Papers 2008-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    18. Li, Jianpei & Zhang, Wanzhu, 2022. "Behavior-based pricing and signaling of product quality," MPRA Paper 120263, University Library of Munich, Germany, revised 03 Jan 2023.
    19. Fabrizio Adriani & Giancarlo Marini & Pasquale Scaramozzino, 2009. "The Inflationary Consequences of a Currency Changeover on the Catering Sector: Evidence from the Michelin Red Guide," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 111-133, February.
    20. Bester, Helmut & Ritzberger, Klaus, 2001. "Strategic pricing, signalling, and costly information acquisition," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1347-1361, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:gamebe:v:128:y:2021:i:c:p:160-181. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.