Transcript Imperfect Information Imperfect Information about Quality Price Dispersion Adverse Selection (a.k.a., the Lemons

Imperfect Information
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Imperfect Information about Quality
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Adverse Selection (a.k.a., the Lemons
Problem)
Price Dispersion
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The Tourist Trap Model
Tourists & Natives
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Used Cars: Full Information
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Problem setup
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Suppose that there are 6 qualities of car,
q, equal to 0,1/4,1/2,3/4,1,5/4,3/2,7/4,2.
The value of the car to the owners is
given by $1000*q
The value of each car to potential buyers who
know the quality is $1500*q.
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Used Cars: Symmetric Information
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Problem setup
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Suppose that there are 6 qualities of car,
q, equal to 0,1/4,1/2,3/4,1,5/4,3/2,7/4,2.
The value of the car to the owners is
given by $1000*q
The value of each car to potential buyers who
know the quality is $1500*q.
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Used Cars: Asymmetric Information
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Problem setup
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Suppose that there are 6 qualities of car,
q, equal to 0,1/4,1/2,3/4,1,5/4,3/2,7/4,2.
The value of the car to the owners is
given by $1000*q
The value of each car to potential buyers who
know the quality is $1500*q.
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Adverse Selection: The Lemons Problem
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Methods of solving the lemons problem
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Warranties
Liability Laws
Reputation
Experts
Standards & Certification
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Limited Information About Price
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Tourist Trap Model
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All firms produce identical products
Individuals have identical demand functions
Guidebook provides tourists with information
on the distribution of prices, but not on what
each firm charges.
It costs a tourist “c” to visit another firm.
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Tourist Trap Model: Variations
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Fixed Number of Firms
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Breaking the Full-Information Competitive
Equilibrium
Reducing Search Costs
Non-Existence of Single Price Equilibrium
Free Entry
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Tourists And Natives
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Description
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“L” consumers, L are natives and (1- )L are tourists
If price <pu each consumer buys one unit of the good
There are “n” firms
Possible Equilibria
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Many Informed Consumers: P = PC
Few informed Consumers: Two prices PU and PC
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Single Price Market
AC
PU
PC
L
q u  1     
n
L
qC   
n
1    
L
 L
n
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Two Price Equilibrium
AC
PU
PC
qa
L
q u  1     
n
L
qC   
n
1    
L
 L
n
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Does Extra Information Lower Price?
Theory
 Grocery Stores
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1974 Price Experiment in Canada
Phase 1: Collect supermarket price info in two
cities- Winnipeg (control) and Ottawa
Phase 2: Published information on prices in the
newspapers of Ottawa
Prices in Ottawa declined high priced stores
more than at low priced stores.
Average food prices fell 1.5% the first week,
and 3.0% by week 2.
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.