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Price formation in a sequential selling mechanism

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  • Ivanova-Stenzel, Radosveta
  • Kröger, Sabine

Abstract

This paper analyzes the trade of an indivisible good within a two-stage mechanism, where a seller first negotiates with one potential buyer about the price of the good. If the negotiation fails to produce a sale, a second-price sealed-bid auction with an additional buyer is conducted. The theoretical model predicts that with risk neutral agents all sales take place in the auction rendering the negotiation prior to the auction obsolete. An experimental test of the model provides evidence that average prices and profits are quite precisely predicted by the theoretical benchmark. However, a significant large amount of sales occurs already during the negotiation stage. We show that risk preferences can theoretically account for the existence of sales during the negotiation stage, improve the fit for buyers' behavior, but is not sufficient to explain sellers' decisions. We discuss other behavioral explanations that could account for the observed deviations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 67 (2008)
Issue (Month): 3-4 (September)
Pages: 832-843

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Handle: RePEc:eee:jeborg:v:67:y:2008:i:3-4:p:832-843

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References

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  1. Radosveta Ivanova-Stenzel & Timothy C. Salmon, 2004. "Bidder Preferences among Auction Institutions," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 223-236, April.
  2. Güth, Werner & Ivanova-Stenzel, Radosveta & Wolfstetter, Elmar, 2001. "Bidding behavior in asymmetric auctions: An experimental study," SFB 373 Discussion Papers 2001,15, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  3. Kagel, J.H. & Levin, D., 1988. "Independent Private Value Auctions: Bidder Behavior In First, Second And Third-Price Auctions With Varying Numbers Of Bidders," Papers 13, Houston - Department of Economics.
  4. Paul Pezanis-Christou, 2002. "On the impact of low-balling: Experimental results in asymmetric auctions," International Journal of Game Theory, Springer, vol. 31(1), pages 69-89.
  5. Palfrey, Thomas R. & Goeree, Jacob & Holt, Charles, 2000. "Quantal Response Equilibrium and Overbidding in Private-value Auctions," Working Papers 1073, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Stanley Reynolds & John Wooders, 2009. "Auctions with a buy price," Economic Theory, Springer, vol. 38(1), pages 9-39, January.
  7. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  8. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March.
  9. Hidvegi, Zoltan & Wang, Wenli & Whinston, Andrew B., 2006. "Buy-price English auction," Journal of Economic Theory, Elsevier, vol. 129(1), pages 31-56, July.
  10. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers 357966000000000089, UCLA Department of Economics.
  11. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  12. Budish, Eric B. & Takeyama, Lisa N., 2001. "Buy prices in online auctions: irrationality on the internet?," Economics Letters, Elsevier, vol. 72(3), pages 325-333, September.
  13. Timothy Mathews, 2004. "The Impact of Discounting on an Auction with a Buyout Option: a Theoretical Analysis Motivated by eBay’s Buy-It-Now Feature," Journal of Economics, Springer, vol. 81(1), pages 25-52, 01.
  14. Anderson, Steve & Friedman, Daniel & Milam, Garrett & Singh, Nirvikar, 2004. "Seller Strategies on eBay," Santa Cruz Department of Economics, Working Paper Series qt43z3965f, Department of Economics, UC Santa Cruz.
  15. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, vol. 45(1), pages 97-113, October.
  16. René Kirkegaard, 2006. "A short proof of the Bulow-Klemperer auctions vs. negotiations result," Economic Theory, Springer, vol. 28(2), pages 449-452, 06.
  17. Chen, Kay-Yut & Plott, Charles R., 1998. "Nonlinear Behavior in Sealed Bid First Price Auctions," Games and Economic Behavior, Elsevier, vol. 25(1), pages 34-78, October.
  18. Timothy Mathews & Brett Katzman, 2006. "The role of varying risk attitudes in an auction with a buyout option," Economic Theory, Springer, vol. 27(3), pages 597-613, 04.
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Citations

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Cited by:
  1. René Kirkegaard & Per Baltzer Overgaard, 2005. "Pre-Auction Offers in Asymmetric First-Price and Second-Price Auctions," CIE Discussion Papers 2005-04, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  2. Shunda, Nicholas, 2009. "Auctions with a buy price: The case of reference-dependent preferences," Games and Economic Behavior, Elsevier, vol. 67(2), pages 645-664, November.
  3. Grebe, Tim & Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2006. "How eBay Sellers set “Buy-it-now†prices - Bringing The Field Into the Lab," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 181, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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