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Classical studies of asymmetric information focus on situations where only one side of a market is informed. This study experimentally investigates a more general case where some sellers are informed and some buyers are informed. We establish the existence of semiseparating perfect Bayesian equilibria where prices serve as informative signals of quality to uninformed buyers, while informed buyers can often leverage their informational advantage by purchasing high quality items from uninformed sellers at bargain prices. These models provide a rational foundation for the co-existence of bargains, price signaling, and Pareto efficiency in markets with asymmetric information. We test these theoretical predictions in a controlled laboratory experiment where agents repeatedly participate in markets with asymmetric information. We observe long run behavior consistent with equilibrium predictions of price signaling, bargains, and partial-pooling behavior.


ESI Working Paper 19-27



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