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Prices as Optimal Competitive Sales Mechanisms

  • Philipp Kircher

    (University of Pennsylvania)

  • Jan Eeckhout

    (University of Pennsylvania)

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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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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  1. Espen R. Moen & A Rosen, 2007. "Incentives in Competitive Search Equilibrium," CEP Discussion Papers dp0832, Centre for Economic Performance, LSE.
  2. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, 01.
  3. 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.
  4. Aleksander Berentsen & Guido Menzio & Randall Wright, 2007. "Inflation and Unemployment: Lagos-Wright meets Mortensen-Pissarides," Kiel Working Papers 1334, Kiel Institute for the World Economy.
  5. Wang, Ruqu, 1993. "Auctions versus Posted-Price Selling," American Economic Review, American Economic Association, vol. 83(4), pages 838-51, September.
  6. Shouyong Shi, 1998. "Frictional Assignment," Working Papers 988, Queen's University, Department of Economics.
  7. Kultti, K.K., 1997. "Equivalence of Auctions and Posted Prices," Discussion Paper 1997-57, Tilburg University, Center for Economic Research.
  8. 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.
  9. Alain Delacroix & Shouyong Shi, 2003. "Directed Search On the Job and the Wage Ladder," Working Papers shouyong-03-04, University of Toronto, Department of Economics.
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