Bargains, price signaling, and efficiency in markets with asymmetric information

We experimentally investigate bargains, price signaling, and efficiency in markets with asymmetric information where some buyers are informed and some sellers are informed. We show that all perfect Bayesian equilibria where transactions occur under known gains from trade fall into one of two categories. In some cases, uninformed sellers charge high prices but uninformed buyers are only willing to pay low prices. Otherwise, uninformed sellers charge low prices and uninformed buyers are willing to pay high prices. This latter case is shown to exhibit more bargains and greater efficiency. Consistent with equilibrium predictions, we observe significantly fewer transactions and bargains in our first treatment. In contrast to equilibrium predictions, uninformed buyers selected far lower reservation prices than informed high quality buyers in the second treatment as predicted by adaptive models. (C) 2021 Elsevier Inc. All rights reserved.