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Search at the Margin

Author

Listed:
  • José A. Carrasco
  • Lones Smith

Abstract

We extend search theory to multiple indivisible units and perfectly divisible assets, solving them respectively with induction and recursion. Buyer demands and prices are random, and the seller can partially exercise orders. With divisible assets, the Bellman value function is increasing and strictly concave, and the optimal reservation price falls in the position, reflecting increasing holding costs (opportunity cost of delaying optionality for inframarginal units). The marginal value exists, and is strictly convex with a falling purchase cap density. Our model is amenable to price-quantity bargaining; e.g., greater buyer bargaining power is tantamount to greater search frictions.

Suggested Citation

  • José A. Carrasco & Lones Smith, 2017. "Search at the Margin," American Economic Review, American Economic Association, vol. 107(10), pages 3146-3181, October.
    • Handle: RePEc:aea:aecrev:v:107:y:2017:i:10:p:3146-81
    Note: DOI: 10.1257/aer.20151579
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    Citations

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    Cited by:

    1. Carrasco, Jose A. & Harrison, Rodrigo, 2023. "Costly multi-unit search," European Economic Review, Elsevier, vol. 154(C).
    2. Klein, Matthew J. & Barham, Bradford L., 2018. "Point Estimates of Household Bargaining Power Using Outside Options," Staff Paper Series 590, University of Wisconsin, Agricultural and Applied Economics.

    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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