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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. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061414, December.
  2. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, Econometric Society, vol. 61(6), pages 1281-1312, November.
  3. Peters, Michael, 1997. "A Competitive Distribution of Auctions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 64(1), pages 97-123, January.
  4. Benoit Julien & John Kennes & Ian King, 2000. "Bidding for Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 619-649, October.
  5. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  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. Wang, Ruqu, 1993. "Auctions versus Posted-Price Selling," American Economic Review, American Economic Association, American Economic Association, vol. 83(4), pages 838-51, September.
  8. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  9. Kultti, Klaus, 1999. "Equivalence of Auctions and Posted Prices," Games and Economic Behavior, Elsevier, Elsevier, vol. 27(1), pages 106-113, April.
  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. Jan Eeckhout & Philipp Kircher, 2010. "Sorting versus screening: search frictions and competing mechanisms," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 29704, London School of Economics and Political Science, LSE Library.
  12. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, Elsevier, vol. 39(9), pages 1747-1764, December.
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Cited by:
  1. Goldberg, Linda S. & Tille, Cédric, 2013. "A bargaining theory of trade invoicing and pricing," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9447, C.E.P.R. Discussion Papers.
  2. Gabriele Camera & Jaehong Kim, 2012. "Buyer's Equilibrium with Capacity Constraints and Restricted Mobility: a Recursive Approach," Working Papers, Chapman University, Economic Science Institute 12-28, Chapman University, Economic Science Institute.

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