Imperfect Competition and Efficiency in Lemons Markets
نویسندگان
چکیده
This paper studies the impact of competition on the degree of inefficiency in lemons markets. More precisely, we characterize the second-best mechanism (i.e., the optimal mechanism with private information) in a stylized lemons market with finite numbers of buyers and sellers. We then study the relationship between the degree of efficiency of the second-best mechanism and market competitiveness. The relationship between the first-best and second-best mechanisms is also explored. JEL Classification Numbers: C7, D4, D61, D82. “. . . most cars traded will be the “lemons,” and good cars may not be traded at all. The “bad” cars tend to drive out the good (in much the same way that bad money drives out the good).” GEORGE A. AKERLOF, The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 1970.
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