Distribution of Price and Quality under Information Asymmetry

32 Pages Posted: 22 Aug 2008 Last revised: 18 Mar 2021

See all articles by Richard D. MacMinn

Richard D. MacMinn

National Chengchi University; The University of Texas

S. Hun Seog

Seoul National University - Business School

Date Written: July 28, 2008

Abstract

This paper presents a model in which firms compete for consumers who make repeat purchases of experience goods. Consumers can observe price offers of firms, even though they may not observe the quality before purchase. We set up a simple two-period model and find the following results. First, we identify the conditions for the equilibrium in which only one quality of firms can be observed in the market. The result shows that the lemons market problem is partially resolved. Second, the market may observe both quality dispersion as well as price dispersion in equilibrium. In such an equilibrium, the lemons are pooled with high quality firms, while the medium quality firms, if they exist, are separated from the pool. We find that the price of the pool is higher than the price of the medium quality firms. Third, we apply our analysis to insurance markets. We show how our results can be related to the insurance cycle, catastrophe insurance, and guaranty funds.

Keywords: search, information asymmetry, distribution of price and quality, insurance

JEL Classification: D83, L15, G22

Suggested Citation

MacMinn, Richard D. and Seog, S. Hun, Distribution of Price and Quality under Information Asymmetry (July 28, 2008). KAIST College of Business Working Paper Series No. 2008-012, Available at SSRN: https://ssrn.com/abstract=1182002 or http://dx.doi.org/10.2139/ssrn.1182002

Richard D. MacMinn

National Chengchi University ( email )

Taipei
Taiwan

The University of Texas ( email )

2317 Speedway
Austin, TX Texas 78712
United States

S. Hun Seog (Contact Author)

Seoul National University - Business School ( email )

1 Gwanak-Ro, Gwanak-Gu
Seoul, 08826
Korea, Republic of (South Korea)