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On the Formation of Buyer-Seller Relationships when Product Quality is Perfectly Observable

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  • Yann Bramoullé
  • John A. List
  • Michael K. Price

Abstract

This study explores the formation of buyer-seller relationships in markets with observable quality. We develop a model that explains why relationships form in equilibrium within such markets. A key feature of our model is that as individuals gain experience in the marketplace, they resolve uncertainty over unobserved bargainer types. Relationships thus form as a means to reduce such transactions costs and uncertainty. We explore the usefulness of our theory by using a battery of simulations and experimental treatments. Overall, we find that our theoretical predictions are largely confirmed. Interestingly, the quantitative impact of relationships on overall market efficiency depends critically on the extend to which market structure affects the matching of buyers and sellers that could profitably transact. In certain important cases, a greater number of buyer-seller relationships can reduce market efficiency.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0740.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0740

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Keywords: Field experiments; pricing; market structure;

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  1. Joyce, Patrick, 1983. "Information and behavior in experimental markets," Journal of Economic Behavior & Organization, Elsevier, vol. 4(4), pages 411-424, December.
  2. Weisbuch, G. & Kirman, A. & Herreiner, D., 1998. "Market Organisation and Trading Relationships," G.R.E.Q.A.M., Universite Aix-Marseille III 98a32, Universite Aix-Marseille III.
  3. Corominas-Bosch, Margarida, 2004. "Bargaining in a network of buyers and sellers," Journal of Economic Theory, Elsevier, vol. 115(1), pages 35-77, March.
  4. Vernon L. Smith, 1965. "Experimental Auction Markets and the Walrasian Hypothesis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 73, pages 387.
  5. Kirman, Alan P. & Vriend, Nicolaas J., 2001. "Evolving market structure: An ACE model of price dispersion and loyalty," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(3-4), pages 459-502, March.
  6. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, Econometric Society, vol. 54(4), pages 785-806, July.
  7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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