Endogenous Entry in Markets with Unobserved Quality

Markets for experience and credence goods can suffer from adverse selection. The negative implication for trading and welfare poses the question of how such markets originate. We consider entry in markets in which each seller's quality becomes private information. Entry lowers prices, which can trigger adverse selection. The anticipated price collapse limits entry so that high prices are sustained, resulting in above normal profits. The analysis suggests that rather than observing the canonical market collapse, markets with asymmetric information about quality may have above normal profits and less entry than would be expected even when there is low concentration.