Consider goods that are almost identical (e.g. cement) and require technical knowledge to understand their merit, which an ordinary consumer might not possess. What then is the feature characteristic of its market structure?


The market for lemons. Paper is here.

The example most commonly given is used cars. The result is market failure.

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  • $\begingroup$ I am still unable to find a form of competition, like monopoly or monopolistic competition, in which this feature is quite visible. If you would like to try I think it would be worthwhile for you to consider goods similar to cement whose purchase is influenced by external factors(Builders recommend a certain retailer/brand) and the consumer has very little knowledge about the prices (as it is not a household good) and also cannot gauge the worth of the good (By looking at cement you cannot state its strength etc). Nevertheless thank you for your reply... $\endgroup$ – Shrey Aryan Dec 15 '15 at 16:33

For any given quality of cement, you can charge a higher price per unit because of information asymmetry. There will be a deadweight loss because of this social cost. The consumers in the market can either pay a screening cost to determine the quality of the cement they need, or the firms can signal the quality of their cement if giving that information freely makes them more competitive and take a larger share of the market.

If capacity and output of cement can be easily changed, we'd probably describe this market with Bertrand competition with differentiation (quality). If every firm prices the same, they split the market, otherwise they can undercut the market and take a large share.

$$\text{market share} = \frac{1}{n} + \frac{\theta^\alpha (n-1)}{n}$$

where $\theta \in (0,1)$ is the degree of quality differentiation, $0$ being complete homogeneity, $1$ being monopoly competition, and anything in between being some sort of monopolistic competition. $\alpha$ is just a scaling factor greater than 0. (As well, $n$ is the number of firms competing.)

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  • $\begingroup$ Could you please add a reference to an online book article/paper/book from where one can understand the significance of this equation or at least go through its derivation. Thank You. $\endgroup$ – Shrey Aryan Dec 16 '15 at 16:35
  • $\begingroup$ I made it on the spot. It's just designed so that at $\theta = 0$, the market share is $1/n$, and at $\theta = 1$, there is no competition, so you get the whole market share for your product. $\alpha$ controls concavity or whatever. $\endgroup$ – Kitsune Cavalry Dec 16 '15 at 17:02
  • $\begingroup$ After recent investigation I found out that cement retailers cannot easily change their capacity, i.e. they will continue to buy, say a 100 bags from the Dealer, and then they are, kind of, forced to sell them. Then which form of competition would you suggest? $\endgroup$ – Shrey Aryan Dec 16 '15 at 17:08
  • $\begingroup$ Oh, are we talking about retailers and not producers? I guess then Cournot competition is more appropriate. $\endgroup$ – Kitsune Cavalry Dec 16 '15 at 18:13
  • $\begingroup$ Could you please justify your claim. $\endgroup$ – Shrey Aryan Dec 16 '15 at 18:25

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