Qualitative Uncertainty in a Market with Bilateral Trading.

Bargaining between a single seller and a succession of potential bu yers of an indivisible object is studied in this paper. The seller bargains with one buyer at a time and switching buyers is costly. The seller does not know the buyers' reservation prices and buyers cannot observe the quality of the object. If the costs of switching buyers are high, there exist s a signaling equilibrium in which the seller's price offer reveals the quality of the object. If the costs of switching are low, adverse selection occurs and the high-quality seller drops out of the market. Copyright 1988 by The editors of the Scandinavian Journal of Economics.