DP14063 The Market for Lemons with Seller Partition

Author(s): Hans Gersbach, Akaki Mamageishvili, Oriol Tejada
Publication Date: October 2019
Keyword(s): Lemons market - Partition - Signaling - Commitment - Decoy ballots
JEL(s): C72, D4, D82, D86
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14063

We introduce a four-stage, multi-prize buying mechanism, which can be used by a (big) buyer to separate low-quality sellers, called "lemon" owners, from high-quality sellers. When the pool of sellers can be partitioned into groups with known mixes of high- and low-quality sellers, the buyer obtains the commodities from the high-quality sellers at a price that matches the willingness to sell. By contrast, "lemon" owners are trapped into selling their items at a low, or even negligible, price. These properties hold even if the buyer cannot commit to a single execution of the mechanism. We outline some applications of our results and suggest that our mechanism might be useful for market makers.