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Prices as Optimal Competitive Sales Mechanisms

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  • 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. 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.
  2. Shouyong Shi, 2002. "A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Biased Technology," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 467-491.
  3. Aleksander Berentsen & Guido Menzio & Randall Wright, 2007. "Inflation and Unemployment: Lagos-Wright meets Mortensen-Pissarides," Kiel Working Papers, Kiel Institute for the World Economy 1334, Kiel Institute for the World Economy.
  4. Wang, Ruqu, 1993. "Auctions versus Posted-Price Selling," American Economic Review, American Economic Association, American Economic Association, vol. 83(4), pages 838-51, September.
  5. Randall Wright & Guillame Rocheteau, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Levine's Bibliography 666156000000000302, UCLA Department of Economics.
  6. Espen R. Moen & A Rosen, 2007. "Incentives in Competitive Search Equilibrium," CEP Discussion Papers, Centre for Economic Performance, LSE dp0832, Centre for Economic Performance, LSE.
  7. Shouyong Shi, 1998. "Frictional Assignment," Working Papers, Queen's University, Department of Economics 988, Queen's University, Department of Economics.
  8. Kultti, Klaus, 1999. "Equivalence of Auctions and Posted Prices," Games and Economic Behavior, Elsevier, Elsevier, vol. 27(1), pages 106-113, April.
  9. Alain Delacroix & Shouyong Shi, 2006. "Directed Search On The Job And The Wage Ladder," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 651-699, 05.
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Cited by:
  1. Wolthoff, Ronald P., 2010. "Applications and Interviews: A Structural Analysis of Two-Sided Simultaneous Search," IZA Discussion Papers 5416, Institute for the Study of Labor (IZA).
  2. Matthew Doyle & Jacob Wong, 2013. "Wage Posting Without Full Commitment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 231-252, April.
  3. Adrian Masters, 2008. "Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium," 2008 Meeting Papers, Society for Economic Dynamics 260, Society for Economic Dynamics.
  4. Jan Eeckhout & Philipp Kircher, 2008. "Sorting and Decentralized Price Competition," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 08-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  5. 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).

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