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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://mpra.ub.uni-muenchen.de/36224/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36224.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:36224

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Keywords: Directed Search; Competing Mechanisms; Risk Aversion;

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  1. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
  2. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  3. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
  4. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, vol. 39(9), pages 1747-1764, December.
  5. Kultti, K.K., 1997. "Equivalence of Auctions and Posted Prices," Discussion Paper 1997-57, Tilburg University, Center for Economic Research.
  6. Michael Peters, 1998. "Limits of Exact Equilibria for Capacity Constrained Sellers with costlySearch," Working Papers peters-98-01, University of Toronto, Department of Economics.
  7. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  8. Wang, Ruqu, 1993. "Auctions versus Posted-Price Selling," American Economic Review, American Economic Association, vol. 83(4), pages 838-51, September.
  9. Michael Peters, 1995. "A Competitive Distribution of Auctions," Working Papers peters-95-03, University of Toronto, Department of Economics.
  10. 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.
  11. 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.
  12. 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.
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Cited by:
  1. Linda Goldberg & Cedric Tille, 2013. "A Bargaining Theory of Trade Invoicing and Pricing," IHEID Working Papers 08-2013, Economics Section, The Graduate Institute of International Studies.
  2. Gabriele Camera & Jaehong Kim, 2012. "Buyer's Equilibrium with Capacity Constraints and Restricted Mobility: a Recursive Approach," Working Papers 12-28, Chapman University, Economic Science Institute.

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