Competition and Price Transparency in the Market for Lemons: Experimental Evidence
American Economic Journal: Microeconomics
vol. 13,
no. 2, May 2021
(pp. 113-40)
Abstract
In markets with asymmetric information, where equilibria are often inefficient, bargaining can help promote welfare. We design an experiment to examine the impact of competition and price transparency in such settings. Consistent with the theoretical predictions, we find that competition promotes efficiency if bargainers cannot observe each other's price offers. Contrary to the predictions, however, the efficiency-enhancing effect of competition persists even when offers are observable. We explore different behavioral explanations for the absence of a detrimental effect of price transparency. Remarkably, implementing the strategy method improves subjects' conditional reasoning, delivering the predicted loss in efficiency when offers are observable.Citation
Bochet, Olivier, and Simon Siegenthaler. 2021. "Competition and Price Transparency in the Market for Lemons: Experimental Evidence." American Economic Journal: Microeconomics, 13 (2): 113-40. DOI: 10.1257/mic.20170087Additional Materials
JEL Classification
- C78 Bargaining Theory; Matching Theory
- D82 Asymmetric and Private Information; Mechanism Design
- L15 Information and Product Quality; Standardization and Compatibility
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