Influence of Informed Buyers in Markets Susceptible to the Lemons Problem

Mahenc, Philippe

doi:10.1111/j.0002-9092.2004.00607.x

Cited by 17 publications

(20 citation statements)

References 10 publications

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“…12 Judd and Riordan (1994) find that a firm launching a new product whose quality it does not know perfectly may be able to use price as a signalling device. Where the firm does know quality, Mahenc (2004) also finds that separation via price is possible, but only if some consumers are perfectly informed.…”

Section: The Optimal Choice Of Reviewer and Pricementioning

confidence: 99%

The optimal choice of pre-launch reviewer

Gill

Sgroi

2012

Journal of Economic Theory

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We consider the impact of pre-launch reviews on sales of products of quality unknown to consumers. Sales occur simultaneously after consideration by a reviewer with a known level of bias. Consumers observe the reviewer's decision and a private signal. Using convex analysis we prove three major results: (i) a monopolist, which can choose the type of reviewer and the price conditional on the chosen reviewer's decision, will always want to have its product reviewed; (ii) choosing an extreme reviewer, that is either the toughest or softest reviewer type available, is always optimal; and (iii) the switch from the toughest to softest reviewer occurs when the precision of private information reaches a calculable threshold. The paper provides a justification for the existence of heavily biased reviews and tests, and also suggests a clear course of action for firms in different situations. For example, an entrant with a very innovative product should risk a tough pre-launch test, while an incumbent with a new product that provides only a small change over an existing one would do best using a soft pre-launch review.

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Section: The Optimal Choice Of Reviewer and Pricementioning

confidence: 99%

The optimal choice of pre-launch reviewer

Gill

Sgroi

2012

Journal of Economic Theory

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“…It is important to understand that a price function incorporating quality and reputation effects is theoretically consistent with the oligopolistic paradigm, as shown by Shaked and Sutton (1982), Tirole (1996) and Mahenc (2004), among others. The Bordeaux grands crus industry was indeed chosen as an illustration of an oligopolistic market, with two differentiated goods that differ in taste and quality, in Mahenc (2004).…”

Section: Reputation and Quality In The Pricing Of Primeur Winementioning

confidence: 98%

“…We assume that sellers know the future quality of their wine at the time of primeur sales and that market conditions are such that primeur prices truly reflect information on quality, i.e., the market is not susceptible to the "lemons" problem as discussed by Akerlof (1970). A sufficiently high fraction of informed buyers acting in the market eliminates the lemons problem (Mahenc 2004), which we assume to be the case for the Bordeaux primeur market. Furthermore, potential buyers are assumed not to be fully informed about wine quality, since wine is not yet finished at the time of primeur sales.…”

Section: Reputation and Quality In The Pricing Of Primeur Winementioning

confidence: 99%

“…In addition to potential market failure due to imperfect competition, the asymmetric information between sellers and buyers is likely to create price distortion. This is because high-quality producers have an incentive to signal the high quality of their wine through the choice of a primeur price (see Shapiro 1983;Mahenc and Meunier 2003;Mahenc 2004). …”

Section: Reputation and Quality In The Pricing Of Primeur Winementioning

confidence: 99%

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The Pricing of Experience Goods: The Example ofen primeurWine

Ali

Nauges²

2007

American J Agri Economics

114

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The market for "primeur" wine in the Bordeaux region allows producers to sell wine that is still in barrels. As with all experience goods, producers send quality signals to uninformed buyers. Using original data on Bordeaux wines, we show that the pricing behaviour of producers depends to a large extent on their reputation, and much less on short-term changes in quality (as measured by experts' grades). We also find that the primeur price has an informative role, since a 10 percent increase in primeur price leads to a 3 percent increase in prices on the market for bottled wine.Keywords: Bordeaux wine, experience good, panel data, quality signal, reputation. Suggested running head:The pricing of en primeur wine While writing this article, Héla Hadj Ali was working as a research fellow at INRA (National Institute for Research in Agriculture), Toulouse (France). Céline Nauges is a senior research fellow at INRA, Toulouse (France).The authors wish to thank Pierre Dubois, Valérie Meunier, Katrin Millock, Michel Simioni, Alban Thomas, Ian M. Sheldon (the editor), Michael Visser, and two anonymous reviewers for their useful comments and suggestions that materially improved the article. The usual caveats apply.-1 -Most food products can be classified as experience goods (Nelson 1970;1974) because their quality can rarely be ascertained before actual consumption.1 A substantial part of the theoretical literature dealing with experience goods has focused on sellers' activity to inform consumers in their purchases, particularly the role of signaling and reputation. Prices, advertising expenditure (Milgrom and Roberts 1986) and warranties (Grossman 1981) are textbook illustrations of how a monopolist can signal the high quality of his product in a game with asymmetric information. Shapiro (1983) emphasized the role of reputation in a perfectly competitive environment by describing how consumers form rational expectations on the quality of experience goods based on the quality of goods produced in the past.In the particular case of food products, producers often choose labeling as a signal of quality. Bureau and Valceschini (2003) showed that labeling helps promote differentiated products and allows small producers to benefit from a well-established collective reputation.More generally, the use of food labels is said to create the potential for price premia (Henneberry and Armbruster 2003).Quantitative measures of these "price premia" are quite rare, as well as, more generally, analyses of the pricing strategy and signaling activity of producers in markets for food products. This is especially the case when compared with hedonic studies that measure the consumers' assessment of food product attributes (see McCluskey and Loureiro 2003, for a review). This article contributes to the empirical literature on experience goods by analysing the pricing behaviour of wine producers from the well-known Bordeaux region in France.Original data on two markets (for "primeur" wine and for bottled wine) provide a unique opportunity to obt...

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“…The first strand of literature includes numerous papers on quality signaling. This research considers mainly prices (see for instance Mahenc, 2004) or advertising (see for instance, Fluet and Garella, 2002) for signaling a higher quality. The framework developed here in the second essay differs by simplifying the consumers' belief and considering GI and BA as persuasive tools that change consumers' preferences.…”

Section: The First Essay "Tariff Equivalent Of Technical Barriers Tomentioning

confidence: 99%

Three essays on food quality and transaction costs

Yue

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Influence of Informed Buyers in Markets Susceptible to the Lemons Problem

Cited by 17 publications

References 10 publications

The optimal choice of pre-launch reviewer

The optimal choice of pre-launch reviewer

The Pricing of Experience Goods: The Example ofen primeurWine

Three essays on food quality and transaction costs

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