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Pricing and Signaling with Frictions

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  • Alain Delacroix
  • Shouyong Shi

Abstract

We study a large market with directed search and signaling. Each seller chooses an investment that determines the quality of the good which is the seller's private information. A seller also chooses the price of the good and the number of selling sites. After observing sellers' choices of prices and sites, but not quality, buyers choose which price to search. The sites posting the same price and the buyers searching for that price match with each other randomly. In this environment, a seller's choices of prices and sites can direct buyers' search decisions and signal quality ex-ante. After matching, a buyer also receives an imperfectly informative signal about the quality of the good and decides whether to trade at the posted price. When the latter signal received is sufficiently accurate, we prove that there is a unique equilibrium. Moreover, when the quality differential is large, the equilibrium (under private information) implements the socially efficient allocation under public information. When the quality differential is small, the equilibrium is inefficient in the quality of goods produced or/and the number of sites created. This inefficiency is caused by a conflict between the search-directing role and the signaling role of a posted price. We also compare the price-posting equilibrium with the equilibrium under bargaining. The bargaining equilibrium features efficient quality, but inefficient entry. It is superior to the price-posting equilibrium when a seller's bargaining power is intermediate and the quality differential is small.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-455.

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Length: Unknown pages
Date of creation: 18 May 2012
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Handle: RePEc:tor:tecipa:tecipa-455

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Keywords: Directed search; Search; Signaling; Pricing; Efficiency;

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References

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  1. Daron Acemoglu & Robert Shimer, 1998. "Holdups and Efficiency with Search Frictions," Working papers 98-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Shouyong Shi, 2006. "Directed Search for Equilibrium Wage-Tenure Contracts," Working Papers tecipa-260, University of Toronto, Department of Economics.
  3. Guido Menzio, 2007. "A Theory of Partially Directed Search," PIER Working Paper Archive 09-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. 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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  8. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
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Citations

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Cited by:
  1. Benjamin Lester & Ludo Visschers & Ronald Wolthoff, 2013. "Competing with asking prices," Working Papers 13-07, Federal Reserve Bank of Philadelphia.
  2. Jonathan Halket & Matteo Pignatti, 2012. "Housing tenure choices with private information," Economics Discussion Papers 717, University of Essex, Department of Economics.
  3. Susan Vroman & Pieter Gautier & James Albrecht, 2007. "Directed Search in the Housing Market," 2007 Meeting Papers 372, Society for Economic Dynamics.
  4. Derek G. Stacey, 2013. "Information, Commitment, and Separation in Illiquid Housing Markets," Working Papers 039, Ryerson University, Department of Economics.
  5. Jean Guillaume Forand, 2007. "Competing Through Information Provision," 2007 Meeting Papers 661, Society for Economic Dynamics.
  6. Jean Guillaume Forand & Vikram Maheshri, 2012. "(De)Regulation and Market Thickness," Working Papers 1202, University of Waterloo, Department of Economics, revised Oct 2012.
  7. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.
  8. Enchuan Shao, 2013. "The Threat of Counterfeiting in Competitive Search Equilibrium," Working Papers 13-22, Bank of Canada.

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