Imperfect Competition and Efficiency in Lemons Markets

Abhinay Muthoo () and Suresh Mutuswami

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: 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.

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Date: 2007-06-26

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