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Prices as Optimal Competitive Sales Mechanisms

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Author Info

  • Philipp Kircher

    (University of Pennsylvania)

  • Jan Eeckhout

    (University of Pennsylvania)

Abstract

We analyze the efficiency properties of price posting in a market where sellers compete for the buyers' business. They key feature of the approach is to investigate price posting as an equilibrium outcome even if sellers can compete with other mechanisms. When buyers are homogeneous, we show equivalence between price posting and a large class of competing mechanisms, including second price auctions. When buyers are heterogeneous, posted prices are able to perfectly screen ex-ante because different buyers endogenously choose to trade at different prices. As a result, search is non-random and buyers sort themselves by choosing different prices. Whether price posting is efficient depends on the matching technology. Prices are efficient and arise in equilibrium when meetings are bilateral, which is the case in competitive search models. When meetings are multilateral, as in directed search models, price posting is not an equilibrium. In that case, the efficient mechanism screens ex post amongst multiple buyers and necessarily involves random search. The conclusion for market design is that the prevalence of price posting over auctions depends crucially on the properties of the meeting technology.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 504.

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Date of creation: 2008
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Handle: RePEc:red:sed008:504

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References

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  1. Espen R. Moen & A Rosen, 2007. "Incentives in Competitive Search Equilibrium," CEP Discussion Papers dp0832, Centre for Economic Performance, LSE.
  2. Alain Delacroix & Shouyong Shi, 2003. "Directed Search On the Job and the Wage Ladder," Working Papers shouyong-03-04, University of Toronto, Department of Economics.
  3. Kultti, K.K., 1997. "Equivalence of Auctions and Posted Prices," Discussion Paper 1997-57, Tilburg University, Center for Economic Research.
  4. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  5. Randall Wright & Guido Menzio & Aleksander Berentsen, 2007. "Inflation and unemployment: Lagos-Wright meets Mortensen-Pissarides," 2007 Meeting Papers 237, Society for Economic Dynamics.
  6. Shi, Shouyong, 2002. "A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Based Technology," Review of Economic Studies, Wiley Blackwell, vol. 69(2), pages 467-91, April.
  7. Wang, Ruqu, 1993. "Auctions versus Posted-Price Selling," American Economic Review, American Economic Association, vol. 83(4), pages 838-51, September.
  8. Shouyong Shi, 1998. "Frictional Assignment," Cahiers de recherche CREFE / CREFE Working Papers 74, CREFE, Université du Québec à Montréal.
  9. 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.
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Cited by:
  1. Matthew Doyle & Jacob Wong, 2008. "Wage Posting Without Full Commitment," School of Economics Working Papers 2008-01, University of Adelaide, School of Economics.
  2. Wolthoff, Ronald P., 2011. "It's About Time: Implications of the Period Length in an Equilibrium Job Search Model," IZA Discussion Papers 6002, Institute for the Study of Labor (IZA).
  3. Jan Eeckhout & Philipp Kircher, 2010. "Sorting and Decentralized Price Competition," Econometrica, Econometric Society, vol. 78(2), pages 539-574, 03.
  4. Ronald P. Wolthoff, 2010. "Applications and Interviews: A Structural Analysis of Two-Sided Simultaneous Search," Working Papers tecipa-418, University of Toronto, Department of Economics.
  5. Adrian Masters, 2008. "Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium," 2008 Meeting Papers 260, Society for Economic Dynamics.

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