Amazon sells two types of handbags: Authentic (denoted A), and Counterfeit (denoted C). Buyers are willing...

 

Transcribed Image Text:

Amazon sells two types of handbags: Authentic (denoted A), and Counterfeit (denoted C). Buyers are willing to pay $200 for an authentic handbag and $20 for a counterfeit handbag. Sellers are willing to sell authentic handbags for $150 and are willing to sell counterfeit handbags for $10. Sellers either sell authentic handbags or counterfeit handbags, but not both. (a) Describe what would happen in this market if buyers could distinguish authentic and counterfeit handbags online before buying them. (b) Now suppose, the two types of handbags are difficult to tell apart online, but once someone owns the handbag in person, they can determine whether the handbag is authentic or counterfeit. What is adverse selection and why might it be relevant in this context? (c) If 50% of the handbag sellers sell authentic handbags, will both types of handbags be sold on Amazon or will only one type of handbag be sold? Briefly explain your answer. (d) Would your answer change if 90% of handbag sellers sold authentic handbags? Briefly explain why or why not. (e) How might reviews on Amazon might play a role in resolving the adverse selection problem? (f) Is there anything that sellers of authentic handbags might be able to do to signal to buyers that the sell authentic handbags? Amazon sells two types of handbags: Authentic (denoted A), and Counterfeit (denoted C). Buyers are willing to pay $200 for an authentic handbag and $20 for a counterfeit handbag. Sellers are willing to sell authentic handbags for $150 and are willing to sell counterfeit handbags for $10. Sellers either sell authentic handbags or counterfeit handbags, but not both. (a) Describe what would happen in this market if buyers could distinguish authentic and counterfeit handbags online before buying them. (b) Now suppose, the two types of handbags are difficult to tell apart online, but once someone owns the handbag in person, they can determine whether the handbag is authentic or counterfeit. What is adverse selection and why might it be relevant in this context? (c) If 50% of the handbag sellers sell authentic handbags, will both types of handbags be sold on Amazon or will only one type of handbag be sold? Briefly explain your answer. (d) Would your answer change if 90% of handbag sellers sold authentic handbags? Briefly explain why or why not. (e) How might reviews on Amazon might play a role in resolving the adverse selection problem? (f) Is there anything that sellers of authentic handbags might be able to do to signal to buyers that the sell authentic handbags?

Answer rating: 100% (QA)

a If buyers can distinguish authentic and counterfeit handbags online before buying them they will make their purchasing decisions based on their preferences and the pricequality relationship Since bu... View the full answer