Faculty of Economics and Business Administration Publications Database

Competitive Search Markets for Durable Goods

Müller, Holger M.
Volume: 19
Number: 3
Pages: 599 - 622
Month: April
ISSN-Print: 0938-2259
Link External Source: Online Version
Year: 2002
Keywords: Lemon markets; Durable goods; Search markets
Abstract: This paper considers a dynamic version of Akerlof''s (1970) lemons problem where buyers and sellers must engage in search to find a trading partner. We show that if goods are durable, the market itself may provide a natural sorting mechanism. In equilibrium, high-quality goods sell at a higher price than low-quality goods but also circulate longer. This accords with the common wisdom that sellers who want to sell fast may have to accept a lower price. We then compare the equilibrium outcomes under private information with those under complete information. Surprisingly, we find that for a large range of parameter values the quilibrium outcomes under the two information regimes coincide, despite the fact that circulation time is used to achieve separation.