Bargaining vs. price competition in a market with quality uncertainty

Economics;Price Policy

Ex-ante price commitment with renegotiation in a dynamic market

This paper studies a dynamic model of a market such as a labour market in which firms post wages and search for workers but trade may occur at a negotiated wage procedure in markets characterized by match-specific heterogeneity. We study a model of a market in which, in each time period, agents on one side (e.g., sellers) choose whether or not to post a price before they encounter agents of the opposite type. After a pair of agents have encountered each other, their match-specific values from trading with each other are realized. If a price was not posted, then the terms of trade (and whether or not it occurs) are determined by bargaining. Otherwise, depending upon the agents’ match-specific trading values, trade occurs (if it does) either on the posted price or at a renegotiated price. We analyze the symmetric Markov subgame perfect equilibria of this market game, and address a variety of issues such as the impact of market frictions on the equilibrium proportion of trades that occur at a posted price rather than at a negotiated price

Buy it Now: A Hybrid Internet Market Institution

This paper analyzes seller choices and outcomes in approximately 700 recent Internet auctions on eBay. The ‘Buy it Now’ option that is available in these auctions allows the seller to supplement or replace the auction with a posted price offer. We use a structural model to control for the endogenous conduct of the auction (e.g., number of bids and bidders) as well as product and seller characteristics. Among other results, we find that the ‘Buy it Now’ option was used more often by sellers with higher ratings (awarded by previous buyers) and sellers offering fewer units; and that posted prices were more prevalent for used items. Sellers obtained higher prices for unused and undamaged items overall, and especially when selling at the ‘Buy it Now’ price.

Price commitment in search markets

Pricing

Ex Ante Price Commitment with Renegotiation in a Dynamic Market

This paper studies the endogenous determination of the price formation procedure in markets characterized by match-specific heterogeneity; such heterogeneity captures, for example, markets in which sellers own differentiated commodities and buyers have heterogeneous preferences. Specifically, we study a dynamic, stochastic model of a market in which, in each time period, agents on one side (e.g., sellers) strategically choose whether or not to "post", or commit themselves to, incomplete price contracts before they encounter agents of the opposite type. After a pair of agents of the opposite types have encountered each other, their match-specific values from trading with each other are realised. If no price contract was posted, then the terms of trade (and whether or not it occurs) are determined by bilateral negotiations. Otherwise, depending upon the agents� match-specific trading values and equilibrium continuation payoffs, trade occurs (if it does) either on the terms specified in the posted contract or at a renegotiated price (when renegotiation of the posted, incomplete price contract is mutually beneficial). We study the Markov subgame perfect equilibria of this market game, and address a variety of issues such as the impact of market frictions on the equilibrium proportion of trades that occur at a price specified in the ex-ante posted contract rather than at a price determined by ex-post bargaining.

Liquidity in frictional asset markets

On November 14-15, 2008, the Federal Reserve Bank of Cleveland hosted a conference on “Liquidity in Frictional Asset Markets.” In this paper we review the literature on asset markets with trading frictions in both finance and monetary theory using a simple search-theoretic model, and we discuss the papers presented at the conference in the context of this literature. We will show the diversity of topics covered in this literature, e.g., the dynamics of housing and credit markets, the functioning of payment systems, optimal monetary policy and the cost of inflation, the role of banks, the effect of informational frictions on asset trading.Liquidity (Economics)

Posted Pricing as a Plus Factor

This paper identifies conditions under which an industry-wide practice of posted (or list) pricing is a plus factor sufficient to conclude that firms violated Section 1 of the Sherman Act. For certain classes of markets, it is shown that, under competition, all firms setting a list price with a policy of no discounting is contrary to equilibrium. Thus, if all firms choose posted pricing, it is to facilitate collusion by making it easier for them to coordinate their prices. It is then argued that the adoption of posted pricing communicates the necessary intent and reliance to conclude concerted action.

Horizontal Product Differentiation in Auctions and Multilateral Negotiations

We experimentally compare first-price auctions and multilateral negotiations after introducing horizontal product differentiation into a standard procurement setting. The two institutions yield the buyer the same surplus, a difference from prior findings with homogeneous products that results from differentiation’s influence on the sellers’ pricing behavior. In particular, we find that introducing product differentiation intensifies price competition among the sellers in some treatments, and has no effect in others, which contrasts with the conventional wisdom that product differentiation softens competition.

Re-matching, Information and Sequencing Effects in Posted Offer Markets

This paper evaluates the effects of some standard procedural variations on outcomes in posted offer oligopoly experiments. Variations studied include the presence or absence of market information, the use of re-matching or fixed seller pairs and alterations in the order of sequencing. Experimental results indicate that such variations can have first order effects on outcomes. For this reason, we recommend that results in oligopoly experiments be carefully interpreted in light of the procedures selected.Market Experiments, Oligopoly, Re-Matching, Information, Market Concentration