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Competition and Efficiency in Markets with Quality Uncertainty

Muthoo, Abhinay and Mutuswami, Suresh (2005) Competition and Efficiency in Markets with Quality Uncertainty. Discussion Paper. University of Essex, Department of Economics, Economics Discussion Papers, Colchester.

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Abstract

This paper addresses the following question: Does competition enhance efficiency in markets with quality uncertainty? Using the mechanism design methodology, we characterize the maximal achievable level of efficiency in such markets, and then use this characterization to analyze how maximal efficiency varies with the degree of market competition. We show that the relationship between them is in general a non-trivial function of the main market parameters. In particular we show: (i) for some set of parameter values maximal efficiency is strictly increasing in the degree of market competition (although it never attains the first-best), but only until competition is sufficiently intense; thereafter, maximal efficiency is strictly decreasing in the degree of competition; (ii) for some set of parameter values maximal efficiency is strictly decreasing in the degree of market competition, attaining the first-best when there is no competition; and (iii) for some set of parameter values maximal efficiency is strictly increasing in the degree of market competition, attains the first-best once competition is sufficiently intense, and then remains at the first-best thereafter.

Item Type: Monograph (Discussion Paper)
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 28 Aug 2014 13:47
Last Modified: 28 Aug 2014 13:47
URI: http://repository.essex.ac.uk/id/eprint/9981

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