Trade Mechanism Selection in Markets with Frictions
24 Pages Posted: 21 Dec 2014
Date Written: December 18, 2003
We endogenize the trade mechanism in a search economy with many homogenous sellers and many heterogenous buyers of unobservable type. We study how heterogeneity and the traders' continuation values - which are endogenous - influence the sellers' choice of trade mechanism. Sellers trade off the probability of an immediate sale against the surplus expected from it, choosing whether to trade with everyone and how quickly. In equilibrium sellers may simply target one buyer type via non-negotiable offers (price posting), or may price discriminate (haggling). We also study when haggling generates trading delays. A price setting externality arises because of a strategic complementarity in the sellers' pricing choices.
Keywords: Search, Prices, Negotiations, Asymmetric Information
JEL Classification: C78, D4, D82, D83
Suggested Citation: Suggested Citation