Trading Mechanism Selection with Directed Search when Buyers are Risk Averse

We endogenize the trading mechanism selection in a model of directed search with risk averse buyers and show that the unique symmetric equilibrium entails all sellers using fixed price trading. Mechanisms that prescribe the sale price as a function of the realized demand (auctions, bargaining, discount pricing, etc.) expose buyers to the "price risk", the uncertainty of not knowing how much to pay in advance. Fixed price trading eliminates the price risk, which is why risk averse customers accept paying more to shop at such stores.Directed Search, Competing Mechanisms, Risk Aversion

Motivated Sellers & Predatory Buyers

We develop an equilibrium search model of the housing market where sellers may become distressed as they are unable to sell. A unique steady state equilibrium exists where distressed sellers attempt fire sales by accepting prices that are substantially below fundamental values. During periods where a large number of sellers are forced to liquidate customers exhibit predation: they hold off purchasing and strategically slow down the speed of trade, which in turn causes more sellers to become distressed. From sellers' point of view liquidity disappears when it is needed the most. The model naturally suggests several proxies of liquidity. Interestingly, the expected time on the market, one of the most frequently used statistics in the literature, does a poor job within the context of fire sales and predation.housing, random search, fire sales, predation, liquidity

Seasonal cycles in the housing market

The housing market exhibits a puzzling yet repetitive seasonal boom and bust cycle where prices and trade volume rise in summers and fall in winters. This paper presents a search model that analytically generates the observed deterministic cycle.housing, search, thin and thick markets, seasonality

Trading mechanism selection with budget constraints

We present an equilibrium search model of competing mechanisms where some buyers are budget constrained. Absent budget constraints, the existing literature capitulates that if buyers differ in their valuations then in the unique equilibrium all sellers hold second price auctions (e.g. McAfee (1993)) whereas if buyers are homogeneous then sellers are indifferent across a large number of payoff-equivalent mechanisms (e.g. Eeckhout and Kircher (2010)). We show that these results are not robust to the presence of budget constrained buyers; merely lowering the budgets of a few buyers renders the auction equilibrium as well as payoff equivalence unsustainable. If buyers differ only slightly in terms of their ability to pay then sellers prefer fixed price trading; otherwise they prefer auctions.Trading Mechanisms, Budget Constraints, Competitive Search

Price Dispersion with Directed Search.

We study a market where identical capacity-constrained sellers compete to attract identical buyers, via price advertisements. Once buyers reach a store, prices might be renegotiable in a manner that is responsive to excess demand. We focus strongly symmetric equilibria, proving their existence and providing explicit solutions for the distributions of advertised and sale prices as functions of market characteristics. Since variations in the posted price can affect the store’s attractiveness and the incidence of haggling, the model endogenizes the ‘pricing convention’ prevailing in the market and generates several empirically testable predictions on market behavior.Directed Search ; Endogenous Trading Mechanisms ; Market Frictions ; Price Dispersion

Bilateral Matching and Latin Squares

We study equilibrium prices and trade volume with n identical buyers and a seller who initially commits to some capacity. Sales are sequential and each price is determined by strategic bargaining. A unique sub-game perfect equilibrium exists. It is characterized by absence of costly bargaining delays and each trade is settled at a different price. Prices increase with n and fall in the seller’s capacity, so if buyers have significant bargaining power, then the seller will strategically constrain capacity to less than n. Thus, despite the efficiency of the bargaining solution, certain distributions of bargaining powers give rise to an allocative inefficiency.Commitment ; Inefficiency ; Peripheral players ; Price heterogeneity ; Strategic bargaining

Distressed sales in OTC markets

We present a stylized model of the over-the-counter markets in the tradition of Duffie Gârleanu and Pedersen (2005) with two distinctive features: (i) buyers have heterogenous preferences and their willingness to pay is private information and (ii) sellers become financially distressed if they cannot sell for too long. A unique steady-state equilibrium exists and it is characterized by predatory buying. Specifically, during periods where sellers are more likely to become distressed (e.g. during economic crises, financial turmoils etc.) buyers become more selective and hold off purchasing despite the abundance of distressed sales and low prices. This reluctance triggers the number of distressed sellers to grow even further and forces them for additional price cuts

Seasonal cycles in a model of the housing market

The US housing market exhibits seasonal boom and bust cycles where prices and the speed of trade (turnover rate) rise in summers and fall in winters. We present a search model that analytically generates the observed cycles. The proposed mechanism is based on swings in market thickness rather than market tightness, the leading explanation in the literature

Multi-player Bargaining with Endogenous Capacity

We study equilibrium prices and trade volume in a market with several identical buyers and a seller who commits to an inventory and then offers goods sequentially. Prices are determined by a strategic costly bargaining process with a random sequence of proponents. A unique subgame perfect equilibrium exists, characterized by no costly delays and heterogeneous sale prices. In equilibrium constraining capacity is a bargaining tactic the seller uses to improve a weak bargaining position. With capacity constraints, sale prices approach the outcome of an auction as bargaining costs vanish. The framework provides a building block for price formation in models of equilibrium search with multilateral matching, and offers a rationale for the adoption of single-unit auctions with fixed reservation price

Price Dispersion with Directed Search

We present a model that generates empirically plausible price distributions in directed search equilibrium. There are many identical buyers and many identical capacity-constrained sellers who post prices. These prices can be renegotiated to some degree and the outcome depends on the number of buyers who want to purchase the good. In equilibrium all sellers post the same price, demand is randomly distributed, and there is sale price dispersion. Prices and distributions depend on market tightness and on the properties of renegotiation outcomes. In a labor market context, the model generates a strong empirical prediction. If workers can renegotiate the posted wage, then the model predicts a positively skewed and realistic-looking density function of realized wages when the mean number of job-seekers per vacancy is large