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Endogenous market segmentation for lemons
Author(s) -
Kim Kyungmin
Publication year - 2012
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2012.00186.x
Subject(s) - information asymmetry , adverse selection , incentive , market segmentation , quality (philosophy) , mechanism (biology) , microeconomics , segmentation , business , social welfare , industrial organization , welfare , economics , market economy , computer science , artificial intelligence , philosophy , epistemology , political science , law
Information asymmetry between sellers and buyers often prevents socially desirable trade. This article presents a new mechanism that mitigates the inefficiencies caused by information asymmetry. I consider decentralized markets under adverse selection and show that such markets can be endogenously segmented in a way that improves social welfare. Endogenous segmentation is driven by low‐quality sellers’ incentive to attract more buyers by separating from high‐quality sellers. The mechanism helps us understand the roles of several real‐world institutions, such as multiple marketplaces, costless advertisements, and nonbinding list prices.