Competition and Price Transparency in the Market for Lemons: Experimental Evidence

Olivier Bochet and Simon Siegenthaler

American Economic Journal: Microeconomics, 2021, vol. 13, issue 2, 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.

JEL-codes: C78 D82 L15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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DOI: 10.1257/mic.20170087

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