Econometrica: Nov, 2011, Volume 79, Issue 6
Nonexclusive Competition in the Market for Lemons
Andrea Attar, Thomas Mariotti, François Salanié
A seller can trade an endowment of a perfectly divisible good, the quality of which she privately knows. Buyers compete by offering menus of nonexclusive contracts, so that the seller can privately trade with several buyers. In this setting, we show that an equilibrium exists under mild conditions and that aggregate equilibrium allocations are generically unique. Although the good for sale is divisible, in equilibrium the seller ends up trading her whole endowment or not trading at all. Trades take place at a price equal to the expected quality of the good, conditional on the seller being ready to trade at that price. Our model thus provides a novel strategic foundation for Akerlof's (1970) results. It also contrasts with competitive screening models in which contracts are assumed to be exclusive, as in Rothschild and Stiglitz (1976). Latent contracts that are issued but not traded in equilibrium play an important role in our analysis.
Supplement to "Non-Exclusive Competition in the Market for Lemons"
This supplement provides a detailed analysis of the exclusive competition game for the two-type specification of the model considered in Section 3 of the paper.