Discussion Paper Details

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Title: Bargaining over a divisible good in the market for lemons

Author(s): Dino Gerardi, Lucas Maestri and Ignacio Monzon

Publication Date: June 2020

Keyword(s): Bargaining, Coase conjecture, divisible objects, gradual sale, interdependent valuations and market for lemons

Programme Area(s): Industrial Organization

Abstract: We study bargaining with divisibility and interdependent values. A buyer and a seller trade a durable good divided into finitely many units. The seller is privately informed about the good's quality, which can be either high or low. Gains from trade are positive and decreasing in the number of units traded by the parties. In every period, the buyer makes a take-it-or-leave-it offer that specifies a price and a number of units. Divisibility introduces a new channel of competition between the buyer's present and future selves. The buyer's temptation to split the purchases of the high-quality good is detrimental to him. As bargaining frictions vanish and the good becomes arbitrarily divisible, the high-quality good is traded smoothly over time and the buyer's payoff shrinks to zero.

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Bibliographic Reference

Gerardi, D, Maestri, L and Monzon, I. 2020. 'Bargaining over a divisible good in the market for lemons'. London, Centre for Economic Policy Research.