Price Formation in a Sequential Selling Mechanism
AbstractThis 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 InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 0530.
Date of creation: 2005
Date of revision:
Auction; negotiation; combined mechanisms; sequential mechanism; risk preferences; experiment;
Other versions of this item:
- Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2005. "Price formation in a sequential selling mechanism," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 92, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-29 (All new papers)
- NEP-COM-2005-10-29 (Industrial Competition)
- NEP-EXP-2005-10-29 (Experimental Economics)
- NEP-MIC-2005-10-29 (Microeconomics)
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