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Trading mechanism selection with budget constraints

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  • Selcuk, Cemil

Abstract

We present an equilibrium search model of competing mechanisms where some buyers are budget constrained. Absent budget constraints, the existing literature capitulates that if buyers differ in their valuations then in the unique equilibrium all sellers hold second price auctions (e.g. McAfee (1993)) whereas if buyers are homogeneous then sellers are indifferent across a large number of payoff-equivalent mechanisms (e.g. Eeckhout and Kircher (2010)). We show that these results are not robust to the presence of budget constrained buyers; merely lowering the budgets of a few buyers renders the auction equilibrium as well as payoff equivalence unsustainable. If buyers differ only slightly in terms of their ability to pay then sellers prefer fixed price trading; otherwise they prefer auctions.

Suggested Citation

  • Selcuk, Cemil, 2011. "Trading mechanism selection with budget constraints," MPRA Paper 36227, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:36227
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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