Buyer Heterogeneity and Dynamic Sorting in Markets for Durable Lemons∗

In a durable good market where sellers have private information about quality, I identify certain problems in dynamic trading and sorting that arise in the presence of heterogeneity among buyers. Higher valuation buyers may have have lower incentive to wait to buy better quality at a later time period. As a result, even though higher quality sellers may wait to sell later at higher prices and distinguish themselves from lower quality sellers, the dynamic price mechanism may not be effective as a sorting device. Under certain conditions, the range of quality traded (over all time periods) may be limited, sometimes no more than that in the static case. Further, even when all qualities are eventually traded, higher valuation buyers may consume lower quality goods, leading to inefficiency in allocation in addition to that caused by delay in trading