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Trading mechanism selection with directed search when buyers are risk averse

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  • Selcuk, Cemil

Abstract

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165176511005246
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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 115 (2012)
Issue (Month): 2 ()
Pages: 207-210

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Handle: RePEc:eee:ecolet:v:115:y:2012:i:2:p:207-210

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Related research

Keywords: Directed search; Competing mechanisms; Risk aversion;

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References

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  1. Peters, Michael, 2000. "Limits of Exact Equilibria for Capacity Constrained Sellers with Costly Search," Journal of Economic Theory, Elsevier, vol. 95(2), pages 139-168, December.
  2. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  3. Jan Eeckhout & Philipp Kircher, 2010. "Sorting versus screening: search frictions and competing mechanisms," LSE Research Online Documents on Economics 29704, London School of Economics and Political Science, LSE Library.
  4. Wang, Ruqu, 1993. "Auctions versus Posted-Price Selling," American Economic Review, American Economic Association, vol. 83(4), pages 838-51, September.
  5. Kultti, K.K., 1997. "Equivalence of Auctions and Posted Prices," Discussion Paper 1997-57, Tilburg University, Center for Economic Research.
  6. Peters, Michael, 1997. "A Competitive Distribution of Auctions," Review of Economic Studies, Wiley Blackwell, vol. 64(1), pages 97-123, January.
  7. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  8. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  9. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, vol. 39(9), pages 1747-1764, December.
  10. Gabriele Camera & Cemil Selcuk, 2010. "Multi-player Bargaining with Endogenous Capacity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 637-653, July.
  11. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
  12. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
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Cited by:
  1. Linda Goldberg & Cedric Tille, 2013. "A bargaining theory of trade invoicing and pricing," Globalization and Monetary Policy Institute Working Paper 144, Federal Reserve Bank of Dallas.
  2. Camera, Gabriele & Kim, Jaehong, 2013. "Buyer’s equilibrium with capacity constraints and restricted mobility: A recursive approach," Economics Letters, Elsevier, vol. 118(2), pages 321-323.

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