The market for strollers and other “lemons”:

Can a new mechanism for product tests improve markets with asymmetric information – in the long run, and with unknown distribution of quality?

Presenter

Ulrike Vollstaedt

University of Duisburg-Essen

Time and location

North Quad 4330, Thursday (1:00-2:00) pm

Abstract

Asymmetric information may decrease both consumer and producer surplus (Akerlof, 1970). Independent product testing organizations like Stiftung Warentest (Germany), Consumer Reports (US) or Which? (UK) can help by providing credible information about product quality. Due to limited testing capacities, the product models to be tested are often chosen to be the bestsellers. This may be problematic due to several reasons. In the short run, selecting bestsellers for a test may exclude product models which dominate these bestsellers, e.g. offer a higher quality at the same price. Instead of selecting bestsellers, Vollstaedt et al. (mimeo) propose a new, capacity-neutral mechanism which allows sellers to apply to be tested. They show both theoretically and experimentally that, when quality and price are given, their new SellersApply mechanism leads to higher consumer surplus and higher profits of sellers with non-dominated product models. The aim of the present study is to investigate how the SellersApply mechanism influences the supply of product models in the long run, i.e., when quality and price are endogenous. More specifically, we investigate the following three questions. (1) Are sellers more likely to provide product models at a lower price and/or of a higher quality? (2) Are sellers with dominated product models more likely to exit the market, thus increasing the correlation between quality and price? (3) Are the results for (1) and (2) robust if buyers do no longer know how product quality is distributed?