Abstract
We document a basic characteristic of adverse selection in secondhand markets for durable goods: goods with higher observed quality may have more adverse selection and hence lower unobserved quality.We provide a simple theoretical model to demonstrate this result, which is a consequence of the interaction of sorting between drivers over observed quality and adverse selection over unobserved quality. We then offer empirical support using data on secondhand prices and repair rates of used cars from the Consumer Expenditure Survey, and discuss a number of implications for everyday advertising and consumer questions.
| Original language | English |
|---|---|
| Pages (from-to) | 3111-3127 |
| Number of pages | 17 |
| Journal | Management Science |
| Volume | 63 |
| Issue number | 9 |
| DOIs | |
| Publication status | Published - Sep 1 2017 |
Fingerprint
Keywords
- Industrial organization: firm objectives
- Market structure and pricing
- Marketing
- Microeconomics
- Pricing
ASJC Scopus subject areas
- Strategy and Management
- Management Science and Operations Research
Cite this
Beautiful lemons : Adverse selection in durable-goods markets with sorting. / Peterson, Jonathan R.; Schneider, Henry S.
In: Management Science, Vol. 63, No. 9, 01.09.2017, p. 3111-3127.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Beautiful lemons
T2 - Adverse selection in durable-goods markets with sorting
AU - Peterson, Jonathan R.
AU - Schneider, Henry S.
PY - 2017/9/1
Y1 - 2017/9/1
N2 - We document a basic characteristic of adverse selection in secondhand markets for durable goods: goods with higher observed quality may have more adverse selection and hence lower unobserved quality.We provide a simple theoretical model to demonstrate this result, which is a consequence of the interaction of sorting between drivers over observed quality and adverse selection over unobserved quality. We then offer empirical support using data on secondhand prices and repair rates of used cars from the Consumer Expenditure Survey, and discuss a number of implications for everyday advertising and consumer questions.
AB - We document a basic characteristic of adverse selection in secondhand markets for durable goods: goods with higher observed quality may have more adverse selection and hence lower unobserved quality.We provide a simple theoretical model to demonstrate this result, which is a consequence of the interaction of sorting between drivers over observed quality and adverse selection over unobserved quality. We then offer empirical support using data on secondhand prices and repair rates of used cars from the Consumer Expenditure Survey, and discuss a number of implications for everyday advertising and consumer questions.
KW - Industrial organization: firm objectives
KW - Market structure and pricing
KW - Marketing
KW - Microeconomics
KW - Pricing
UR - http://www.scopus.com/inward/record.url?scp=85028985202&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85028985202&partnerID=8YFLogxK
U2 - 10.1287/mnsc.2016.2495
DO - 10.1287/mnsc.2016.2495
M3 - Article
VL - 63
SP - 3111
EP - 3127
JO - Management Science
JF - Management Science
SN - 0025-1909
IS - 9
ER -