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Outside Options and the Failure of the Coase Conjecture

  • Simon Board
  • Marek Pycia

A buyer wishes to purchase a good from a seller who chooses a sequence of prices over time. Each period the buyer can also exercise an outside option, abandoning their search or moving on to another seller. We show there is a unique equilibrium in which the seller charges a constant price in every period equal to the monopoly price, contravening the Coase conjecture. We then embed the singleseller model into a search framework and show the result provides a foundation for the usual "no haggling" assumption.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.104.2.656
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File URL: http://www.aeaweb.org/aer/ds/10402/20110634_ds.zip
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 104 (2014)
Issue (Month): 2 (February)
Pages: 656-71

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Handle: RePEc:aea:aecrev:v:104:y:2014:i:2:p:656-71
Note: DOI: 10.1257/aer.104.2.656
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  1. Simon P. Anderson & Regis Renault, 1999. "Pricing, product diversity, and search costs: a Bertrand-Chamberlin-Diamond model," Virginia Economics Online Papers 335, University of Virginia, Department of Economics.
  2. Peter C. Cramton, 1991. "Dynamic Bargaining with Transaction Costs," Management Science, INFORMS, vol. 37(10), pages 1221-1233, October.
  3. Bikhchandani, Sushil, 1992. "A Bargaining Model with Incomplete Information," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 187-203, January.
  4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  5. Lawrence M. Ausubel & Raymond J. Deneckere, 1987. "One is Almost Enough for Monopoly," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 255-274, Summer.
  6. Eric W. Bond & Larry Samuelson, 1984. "Durable Good Monopolies with Rational Expectations and Replacement Sales," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 336-345, Autumn.
  7. Wolinsky, Asher, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 493-511, August.
  8. Barak Orbach, . "The Durapolist Puzzle: Monopoly Power in Durable-Goods Market," University of Michigan John M. Olin Center for Law & Economics Working Paper Series umichlwps-1000, University of Michigan John M. Olin Center for Law & Economics.
  9. Faruk Gul, 1987. "Noncooperative Collusion in Durable Goods Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 248-254, Summer.
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