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Price formation in a sequential selling mechanism

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  • Ivanova-Stenzel, Radosveta
  • Kröger, Sabine

Abstract

This paper analyzes the trade of an indivisible good within a two-stage mechanism, where a seller first negotiates with one potential buyer about the price of the good. If the negotiation fails to produce a sale, a second–price sealed–bid auction with an additional buyer is conducted. The theoretical model predicts that with risk neutral agents all sales take place in the auction rendering the negotiation prior to the auction obsolete. An experimental test of the model provides evidence that average prices and profits are quite precisely predicted by the theoretical benchmark. However, a significant large amount of sales occurs already during the negotiation stage. We show that risk preferences can theoretically account for the existence of sales during the negotiation stage, improve the fit for buyers’ behavior, but is not sufficient to explain sellers’ decisions. We discuss other behavioral explanations that could account for the observed deviations.

Suggested Citation

  • Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2005. "Price formation in a sequential selling mechanism," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 92, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:92
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    References listed on IDEAS

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    1. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-194, March.
    2. Radosveta Ivanova-Stenzel & Timothy C. Salmon, 2004. "Bidder Preferences among Auction Institutions," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 223-236, April.
    3. Stanley Reynolds & John Wooders, 2009. "Auctions with a buy price," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(1), pages 9-39, January.
    4. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2002. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, Elsevier, vol. 104(1), pages 247-272, May.
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    7. Kagel, John H & Levin, Dan, 1993. "Independent Private Value Auctions: Bidder Behaviour in First-, Second- and Third-Price Auctions with Varying Numbers of Bidders," Economic Journal, Royal Economic Society, vol. 103(419), pages 868-879, July.
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    11. Hidvegi, Zoltan & Wang, Wenli & Whinston, Andrew B., 2006. "Buy-price English auction," Journal of Economic Theory, Elsevier, vol. 129(1), pages 31-56, July.
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    14. Guth, Werner & Ivanova-Stenzel, Radosveta & Wolfstetter, Elmar, 2005. "Bidding behavior in asymmetric auctions: An experimental study," European Economic Review, Elsevier, vol. 49(7), pages 1891-1913, October.
    15. Chen, Kay-Yut & Plott, Charles R., 1998. "Nonlinear Behavior in Sealed Bid First Price Auctions," Games and Economic Behavior, Elsevier, vol. 25(1), pages 34-78, October.
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    Citations

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    Cited by:

    1. Shunda, Nicholas, 2009. "Auctions with a buy price: The case of reference-dependent preferences," Games and Economic Behavior, Elsevier, vol. 67(2), pages 645-664, November.
    2. Kirkegaard, René & Overgaard, Per Baltzer, 2008. "Pre-auction offers in asymmetric first-price and second-price auctions," Games and Economic Behavior, Elsevier, vol. 63(1), pages 145-165, May.
    3. Grebe, Tim & Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2016. "“Buy-It-Now” or “Sell-It-Now” auctions: Effects of changing bargaining power in sequential trading mechanisms," Economics Letters, Elsevier, vol. 142(C), pages 27-30.
    4. Grebe, Tim & Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2018. "How Do Sellers Benefit From Buy-It-Now Prices in Ebay Auctions? -- an Experimental Investigation," Rationality and Competition Discussion Paper Series 97, CRC TRR 190 Rationality and Competition.
    5. Björn Bartling & Tobias Gesche & Nick Netzer, 2017. "Does the absence of human sellers bias bidding behavior in auction experiments?," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 3(1), pages 44-61, July.
    6. Tim Grebe & Radosveta Ivanova-Stenzel & Sabine Kröger, 2009. "Buy-it-Now Prices in eBay Auctions-The Field in the Lab," Cahiers de recherche 0950, CIRPEE.
    7. Grebe, Tim & Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2006. "How eBay Sellers set “Buy-it-now†prices - Bringing The Field Into the Lab," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 181, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

    More about this item

    Keywords

    auction; negotiation; combined mechanism; sequential mechanism; risk preferences; experiment;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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