TY  - GEN
AB  - This work takes a closer look on the predominant assumption in
usual lemon market models of having finitely many or even only two different
levels of quality. We model a situation which is close to the classical monopolistic
setting but admits an interval of possible quality values. Additionally,
to make the model interesting, the consumer receives a signal which is correlated
to the quality level and is her private information. We introduce a new
concept for the consumer reaction to the received information, encompassing
rationality but also allowing for a certain degree of imperfection. We find that
there is always a strictly positive price-quality relation in equilibrium but the
classical adverse selection effects are not observed. In contrast, low quality
levels do not make any sales. After applying a refinement to these equilibria,
we show that when the additional signal is very precise, more low quality
levels are excluded from the market. In the limit of perfect information, the
market breaks down, a behavior completely opposed to the original perfect
information case. These different and quite extreme results compared to the
classical lemon market case should serve as a warning to have a closer look
at the assumption of having finitely many quality levels.
DA  - 2014
KW  - Quality uncertainty
KW  - Price signaling
KW  - Adverse selection
KW  - Two-sided incomplete information
LA  - eng
PY  - 2014
SN  - 0931-6558
SP  - 39-
TI  - A Model of Quality Uncertainty with a Continuum of Quality Levels
UR  - https://nbn-resolving.org/urn:nbn:de:0070-pub-29016490
Y2  - 2024-11-22T10:56:04
ER  -