Skip to main content
Discussion Paper

Competitive Screening and Market Segmentation

We characterize competitive equilibrium in markets (financial etc.) where price taking Bayesian decision makers screen to accept or reject applicants. Unlike signaling models, equilibrium fails to resolve imperfect information. In classical statistics terminology, some qualified applicants are rejected (type I error) and some unqualified applicants are accepted (type II error). We report three new results: i. optimal firm behavior is deduced to be a Bayesian variant of the Neyman-Pearson theorem; ii.