PRESENTATION BY :

ASHWIN KUMAR GOYAL (20110008)

MUDIT DESAI (20110027)
SUMIT SAROHA (20110050)

Does an informed player have a reason to signal her type to
her opponent?
Can the informed player do so credibly?
Suppose the players are a buyer and a seller. The seller is
one of two types: Either a cherry (good quality)
or a lemon (bad quality).
How are market price and availability affected by buyer
uncertainty?
Would buyers only be willing to pay for average quality?
Would a willingness to pay only for average quality cause
owners of higher quality goods to withhold their goods from
the market?
Will poor quality goods drive high quality goods from the
market?

TABLE 1
Valuation Repair Cost Net Valuation



Lemon
Buyer 3200 1700 1500
Seller 2700 1700 1000



Cherry
Buyer 3200 200 3000
Seller 2700 200 2500
Table 2
Buyer Seller


Lemon
Warranty
For p < 2700, G = 0 since
the seller keeps the car
when the price is so low.

G = 3200-p for p 2700
For p < 2700, G = 1000 since the net
value of holding onto the lemon is
1000 and no trade takes place.

G = p-repair for p 2700

No Warranty
G = 0 for p < 1000 since the
seller keeps the car.
G = 3200-repair-p

G = 1000 for p<1000

G = price for p 1000


Cherry
Warranty

G = 0 for p<2700 since the
seller keeps the car if he
cannot get at least 2700 for
it.

G = 3200-p for p 2700
G = 2500 for p < 2700 since 2500 is
the seller's net value from holding
onto a cherry.

G = p-repair for p 2700
No Warranty

G=0 for p<2500
G=3200-p-repair for p 2500
G = 2500 for p < 2600

G = p for p 2600
Table 3

Price

Lemon

Cherry

Warranty

No Warranty

Warranty

No Warranty
Buyer Seller Buyer Seller Buyer Seller Buyer Seller
1000 0 1000 500 1000 0 2500 0 2500
1200 0 1000 300 1200 0 2500 0 2500
1400 0 1000 100 1400 0 2500 0 2500
1500 0 1000 0 1500 0 2500 0 2500
1600 0 1000 -100 1600 0 2500 0 2500
1800 0 1000 -300 1800 0 2500 0 2500
2000 0 1000 -500 2000 0 2500 0 2500
2200 0 1000 -700 2200 0 2500 0 2500
2400 0 1000 -900 2400 0 2500 0 2500
2500 0 1000 -1000 2500 0 2500 500 2500
2600 0 1000 -1100 2600 0 2500 400 2600
2700 500 1000 -1200 2700 500 2500 300 2700
2800 400 1100 -1300 2800 400 2600 200 2800
2900 300 1200 -1400 2900 300 2700 100 2900
3000 200 1300 -1500 3000 200 2800 0 3000
3100 100 1400 -1600 3100 100 2900 -100 3100
3200 0 1500 -1700 3200 0 3000 -200 3200
Consider the market for lemons with
a warranty. If Buyer offers to pay
$2800 then the net value of the car
to him is $400. The net value of the
trade to seller is $1100. Indeed,
there is non-negative net value to
both of them at any price between
$2700 and $3200. At a price below
$2700 buyer feels that he is better
off hanging onto the car, so no trade
takes place. When lemons are offered
with no warranty there are
opportunities for trade between a
price of $1000 and 1500. Checking
the table you can see that at a price
of 1500 buyer is indifferent to the
trade and seller values the trade at
1500, which is greater than his
intrinsic value of the car.

Consider the market for Cherries with
a warranty. Trades will take place
between a price of $2700, where
seller is indifferent to the trade, and
3200, where buyer is indifferent to the
trade. When there is no warranty then
trades will take place between $2500,
when seller is indifferent, and $3000,
where buyer is indifferent.

Washington DC March 23, 2009; The AIADA
newsletter reported that economic
uncertainty, tighter credit standards, and
stronger warranties on nearly new vehicles
are luring price-conscious, credit-squeezed
consumers away from new cars and trucks to
used ones.
According to the Detroit Free Press, last year,
more than 13% of new car shoppers left
dealerships with a certified used vehicle
instead, up from 8.3 % in 2003.
While new car sales are expected to decline to
as low as 10.1 million this year, from dismal
sales of 13.2 million in 2008, CNW Marketing
Research is forecasting that used vehicle sales
will grow through 2012. This year, the firm
forecasts used car sales of 40 million, up 9.5
% from 2008's weak volume of 36.5 million.
Already, 42% of dealers are reporting too little
used vehicle inventory as a result of the trend,
according to a March survey by Wachovia
Securities analyst Rich Kwas. He added that
was the highest level recorded in the past
three years.
This is good news for dealers, who often will make a bigger profit on selling a
2- or 3-year-old car than on selling or leasing customers a new one.
http://www.theautochannel.com/news/2009/03/23/454304.html