Asking Prices and Inspection Goods

When a seller with a single, indivisible good meets with potential buyers sequentially, the process of price determination often involves an asking price: the seller quotes a price at which he is willing to sell immediately, but he also allows bids below this price and can recall such bids after meeting with other buyers. In most models of trade, this pricing mechanism is either infeasible or sub-optimal. In this paper, we consider an environment where asking prices are a simple, yet natural trading mechanism that allows buyers and sellers to cope with certain trading frictions. We characterize equilibrium asking prices and allocations, establish that this allocation is constrained efficient, and then derive a rich set of testable implications that emerge from our theory.