Market transparency

Abstract: The starting point in industrial organization is the notion of perfect competition. In a market with perfect competition, everything is transparent. In particular, there is perfect information about price, product value and firms' actions. This dissertation deals with exceptions from the world of perfect competition. The first two essays deal with imperfect information about prices and firms' actions, whereas the third essay considers imperfect information about the value of the traded goods. The first essay "Transparency and Competition" asks the question If prices are more or less transparent, does that favour consumers or producers? Starting from a search model, where some consumers know prices and other have to search, it is shown that a greater price transparency, i.e. a lower search cost, reduces the price in a single play of the game. When the game is repeated, however, the lower is the search cost, the easier it is to sustain collusion. Thus, promoting greater price transparency reduces the price in the stage game at the risk of increased opportunity for collusion. The second essay "Does Advertising Prevent Collusion?" analyses the case when firms can transmit price information to consumers by advertising. In contrast to the first essay, improved price transparency through advertising always reduces the price. It is even shown that the mere possibility of advertising can reduce the price, when firms are colluding. Thus, it is important to distinguish between advertising by firms and price publication by a third party. The first fosters competition, whereas thesecond may be harmful. In the third essay "Underwriter Competition" it is not the price that is more or less transparent. Instead, we consider a situation where sellers cannot transfer knowledge about their product values to the buyers. In order to overcome this problem, sellers may hire a renowned third party, an underwriter, who can certify that the products are of a certain value. The question that is posed in this essay is What happens if sellers can chose between different underwriters? It is shown that the underwriter market is a natural monopoly, where the underwriter with the highest ability toassess the value of the products gets the whole market.