Price signaling and the strategic benefits of price rigidities

We analyze trade between a perfectly informed price setting party (seller) and an imperfectly informed price taker (buyer). Differently from most of the literature, we focus on the case in which, under full information, it would be inefficient to trade goods of sufficiently poor quality. We show that the unique equilibrium surviving D1 is characterized by market breakdown, although trade would be mutually beneficial in some state of nature. This occurs independently of the precision of the information available to the buyer. The model thus implies that signaling through prices may exacerbate the effect of adverse selection rather than mitigate it. Under D1, the seller would always benefit from committing to prices that do not reveal her information. We develop this intuition by analyzing the strategic advantages of price rigidities. We show that price rigidities help restore trade and could even enhance effectiveness of prices as signals of quality.     

Sorting versus screening: Search frictions and competing mechanisms

In a market where sellers compete by posting trading mechanisms, we allow for a general search technology and show that its features crucially affect the equilibrium mechanism. Price posting prevails when meetings are rival, i.e., when a meeting by one buyer reduces another buyer's meeting probability. Under price posting buyers reveal their type by sorting ex-ante. Only if the meeting technology is sufficiently non-rival, price posting is not an equilibrium. Multiple buyer types then visit the same sellers who screen ex-post through auctions.     

STRATEGIC ADVERTISING AND DIRECTED SEARCH

Imperfect observability and costly informative advertising are introduced into a standard directed search framework. Capacity‐constrained sellers send costly advertisements to direct buyers' uncoordinated search by specifying their location and terms of trade. We show that the equilibrium advertising intensity is nonmonotonic in the buyer–seller ratio. In addition, we also find that price posting dominates auctions since both mechanisms yield the same expected revenue, but the latter results in higher advertising expense. Finally, we find a positive comovement between market transparency and price for low market tightness when the measure of informed buyers is endogenous.     

Ascending price Vickrey auctions

We show that an ascending price auction for multiple units of a homogeneous object proposed by Ausubel (i) raises prices for packages until they reach those nonlinear and non-anonymous market clearing prices at which bidders get their marginal products and (ii) the auction is a primal–dual algorithm applied to an appropriate linear programming formulation in which the dual solution yields those same market clearing prices. We emphasize the similarities with efficient incentive compatible ascending price auctions to implement Vickrey payments when there is a single object or when objects are heterogeneous but each buyer does not desire more than one unit. A potential benefit of these common threads is that it helps to establish the principles upon which Vickrey payments may be implemented through decentralized, incentive compatible procedures.     

Time-on-the-Market as a Sign of Quality

The inferences a prospective home buyer can make about the quality of a house from the amount of time it spends on the market and the seller"s optimal strategy in light of these inferences are investigated. Depending upon the information structure, the seller may have an incentive to post an inordinately high initial price (in order to "dampen" the signal transmitted to future prospective buyers) or an inordinately low initial price (in order to make an early sale and avoid consumer "herding"). It is shown that the sellers of high-quality homes do best when inspection outcomes are publicly recorded and do worst when inspection outcomes are not public and the price history is not observable. Costly inspections create more adverse selection but deter consumer herding.     

Dissertation abstract: Essays on pricing in experimental duopoly markets

This dissertation comprises three independent essays that analyze pricing behavior in experimental duopoly markets. The first essay examines whether the content of buyer information and the timing of its dissemination affects seller market power. We construct laboratory markets with differentiated goods and costly buyer search in which sellers simultaneously post prices. The experiment varies the information on price or product characteristics that buyers learn under different timing assumptions (pre- and post-search), generating four information treatments. Theory predicts that price information lowers the equilibrium price, but information about product characteristics increases the equilibrium price. That is, contrary to simple intuition, presence of informed buyers may impart a negative externality on other uninformed buyers. The data support the model's negative externality result when sellers face a large number of robot buyers that are programmed to search optimally. Observed prices conform to the model's comparative statics and are broadly consistent with predicted levels. With human buyers, however, excessive search instigates increased price competition and sellers post prices that are significantly lower than predicted. The second essay uses experimental methods to demonstrate the anti-competitive potential of price-matching guarantees in both symmetric and asymmetric cost duopolies. When costs are symmetric, price-matching guarantees increase the posted prices to the collusive level. With asymmetric costs, guaranteed prices remain high relative to prices without the use of guarantees, but the overall ability of guarantees to act as a collusion facilitating device depends on the relative cost difference. Fewer guarantees, combined with lower average prices, suggest that cost asymmetries may discourage collusion. The third essay investigates the effect of firm size asymmetry on the emergence of price leadership in a homogeneous good duopoly. With discounting, the unique subgame-perfect equilibrium predicts that the large firm will emerge as the endogenous price leader. Independent of the level of size asymmetry, the laboratory data indicates that price leadership by the large firm is one of the most frequently observed timings of price announcement. In most cases, however, it comes second to simultaneous price-setting. This tendency to wait for the other firm to announce its price is especially strong when the level of size asymmetry between firms is low. We attribute the lower than expected frequency of price leadership to coordination failure, which is further compounded by elements of inequity aversion. JEL Classification C91, D43, D83, L11 Dissertation Committee: Timothy Cason (Chair), Department of Economics, Purdue University Dan Kovenock, Department of Economics, Purdue University Stephen Martin, Department of Economics, Purdue University Marco Casari, Department of Economics, Purdue University     

Sequential selling mechanisms

Summary In this paper we attempt to formalize the idea that a mechanism that involves multilateral communication between buyers and sellers may be dominated by one that involves simple bilateral communication. To do this we consider the well known problem in which a seller tries to sell a single unit of output to a group ofN buyers who have independently distributed private valuations. Our arguments hinge on two considerations. First, buyers communicate their willingness to negotiate with the seller sequentially, and second, buyers have the option of purchasing the good from some alternative supplier. It is shown that the seller cannot improve upon a procedure in which she offers the good to each buyer in turn at a fixed price. The seller reverts to multilateral communication if possible, only when no buyer is willing to pay the fixed price. In reasonable environments buyers will be too impatient to wait for the outcome of a multilateral negotiation and all communications will be bilateral.In many problems in mechanism design, informed traders have no alternative to participation in the mechanism that is offered by its designer. The best mechanism from the designer's point of view is then the one that is most efficient at extracting informational rents, that is, a simple auction. In a competitive environment it is likely to be costly for buyers to participate in an auction or any other multilateral selling scheme in which the seller must process information from many different buyers because alternative trading opportunities will be disappearing during the time that the seller is collecting this information. Buyers might be willing to participate in an auction, but only if they could be guaranteed that the competition that they face will not eliminate too much of their surplus.At the other extreme to the auction is a simple fixed price selling scheme 1. The seller simply waits until he meets a buyer whose valuation is high enough, given the opportunities that exist in the rest of the market, for him to be willing to pay this price. The seller extracts the minimum of the buyer's informational rents since the price that a buyer pays is independent of his valuation. Yet the seller might like this scheme if adding a second bidder to the process makes it very difficult for him to find a buyer with a valuation high enough to want to participate.In the presence of opportunity costs, the seller faces a trade-off between his ability to extract buyers informational rents and his ability to find buyers who are willing to participate in any competitive process. In practice this trade-off will impose structure on the method that is used to determine a price. In markets where there are auctions, limits are put on buyer participation. In tobacco auctions bids are submitted at a distinct point in time from buyers who are present at that time. In real estate auctions time limits are put on the amount of time the seller will wait before making a decision. These restrictions on participation are presumably endogenously selected by the seller (possibly in competition with other mechanism designers) with this trade-off in mind.On the other hand, markets in which objects appear to trade at a fixed price are rarely so simple. A baker with a fixed supply of fresh bagels is unlikely to collect bids from buyers and award the bagels to the high bidder at the end of the day. Buyers are unlikely to be willing to participate in such a scheme since they can buy fresh bagels from a competitor down the street. Yet despite the fact that bagels sell at a fixed price throughout the day, most bakers are more than willing to let it be known that they will discount price at the end of the day on any bagels that they have not yet sold. Selling used cars presents a similar problem. Each potential buyer for the used car is likely to have inspected a number of alternatives, and is likely to know the prices at which these alternative can be obtained. A seller who suggests that buyers submit a bid, then wait until the seller is sure that no higher offer will be submitted is asking buyers to forgo these alternative opportunities with no gain to themselves. To avoid the rigidity of the pure fixed price scheme most used cars are sold for a fixed price or best offer. These examples suggest that the best selling mechanism may involve a complex interplay between participation and surplus extraction considerations.The purpose of this paper is to provide a simple formalism within which the factors that determine the best contract can be evaluated. We consider the best known environment from the point of view of auction design in which there are a large number of buyers with independent private valuations for a unit of an indivisible commodity that is being sold by a single supplier who acts as the mechanism designer. We modify this standard problem in two critical ways. First, we assume that the seller meets the potential buyers sequentially rather than all at once. Secondly we assume that buyers have a valuable alternative that yields them a sure surplus. This creates a simple bidding cost that is effectively the expected loss in surplus (created by the disappearance of outside alternatives) that the buyer faces during the time that he spends negotiating with the seller.These simple assumptions allow us to calculate the impact of competition and communication costs using completely standard arguments from the mechanism design literature. We are able to show that with these assumptions the seller's expected surplus will be highest if the object is sold according to the following modified fixed price scheme: the seller contacts each of the potential buyers in turn and either offers to negotiate or announces that he no longer wishes to trade. If he offers to negotiate and the buyer agrees, the buyer immediately has the option of trading for sure with the seller at a fixed price set ex ante. If the buyer does not wish to pay this fixed price, he may submit an alternative bid. The seller will then continue to contact new buyers, returning to trade with the buyer only if no buyer wishes to pay the fixed price and no higher bid is submitted.It will be clear that in our environment, both the simple fixed price scheme and the simple auction are feasible. The simple auction prevails when the fixed price is set equal to the maximum possible valuation, while the simple fixed price scheme occurs when the fixed price is set so that buyers are willing to participate if and only if they are willing to pay the fixed price. Our results will show that a simple auction in never optimal for the seller. The seller can always strictly improve his payoff by moving to a scheme in which there is some strictly positive probability that trade will occur at the fixed price. On the other hand, there are reasonable circumstances in which the seller cannot achieve a higher payoff than the one she gets by selling at a fixed price. It is shown that for any positive participation cost, there is a large, but finite, number of potential buyers so that the seller cannot achieve a higher payoff than what she gets by selling at a fixed price. Two simple, but important continuity results are also illustrated. As the cost of participation in the mechanism increases (decreases), the probability with which the seller's unit of output is sold at a fixed price goes to one (zero) in the best modified fixed price mechanism for the seller.Our paper is not the first to generate such a modified fixed price scheme. Both McAfee and McMillan (1988) and Riley and Zeckhauser (1983) come up with similar schemes for the case in which the seller must bear a fixed cost for each new buyer that she contacts. There are two essential differences between our model and theirs. First, as the cost is interpreted as the opportunity cost of participation in the mechanism, it is reasonable to imagine that the seller advertises the mechanism ex ante. Another way of putting this is that the seller pays a fixed rather than a variable cost to communicate the mechanism to buyers. This makes it possible to assume that the mechanism is common knowledge to the seller and all the buyers at the beginning of the communication process. For this reason we can make our case using completely standard arguments. Secondly, the mechanism in the opportunity cost case plays a different allocative role than it does in the case when the seller bears a cost. The mechanism must decide whether buyers should communicate with the seller or pursue their alternative activities, as well as who should trade and at what price. It is this allocative role that makes bilateral communication superior to multilateral communication in a competitive environment. These differences allow us to show, for example, that a simple fixed price scheme is undominated for the seller when the number of buyers is finite. As shown by McAfee and McMillan, this is only possible when the number of potential buyers is infinite when the seller bears the cost of communication.Remarkably, the existence of opportunity costs to buyer participation is not, by itself, sufficient to explain why sellers might prefer bilateral communications mechanisms. Samuelson (1983) and McAfee and McMillan (1987) show that when buyers must pay a fixed cost to submit a bid, which is equivalent to giving up a valuable alternative, a seller cannot expect to earn more than she does in a second price auction (though Samuelson shows that the reserve price may depend on the number of potential buyers). One of the contributions of this paper is to show that the assumption that buyers make their participation decisions simultaneously is critical to this result. Simultaneous entry decisions means that whether or not any particular buyer is assigned to the alternative activity is independent of any other buyer's valuation. With sequential communication the seller is able to relax this constraint. It is precisely the enlargement of the class of feasible mechanism that breaks down the optimality of the simple auction.The second author acknowledges the support of the Social Sciences and Humanities Research Council of Canada and the CRDE at the Université de Montreal.     

Risk aversion and optimal reserve prices in first- and second-price auctions

We analyze the effects of buyer and seller risk aversion in first- and second-price auctions in the classic setting of symmetric and independent private values. We show that the seller's optimal reserve price decreases in his own risk aversion, and more so in the first-price auction. The reserve price also decreases in the buyers' risk aversion in the first-price auction. Thus, greater risk aversion increases ex post efficiency in both auctions - especially that of the first-price auction. At the interim stage, the first-price auction is preferred by all buyer types in a lower interval, as well as by the seller.     

政府管制与房价持续上升

本文认为房价持续上升的原因是政府对房地产市场的资本进入限制。消费者对住房的需求旺盛。拉高了房价，房地产公司的利润丰厚。问题是房地产公司为什么能一直保持丰厚的利润？其原因就是政府对房地产市场的资本进入限制所造成的房地产市场的垄断。本文比较了都存在信息不对称性的家庭装修市场和房地产市场不同的市场结构，不同的发展结果。最终得出结论：只有房地产市场的激励竞争才能解决房价持续上涨的根本问题．所以在强化政府这只看得见的手的作用的同时，不要抑制了市场这只看不见的手的作用。     

Seller competition by mechanism design

This paper analyzes a market game in which sellers offer trading mechanisms to buyers and buyers decide which seller to go to depending on the trading mechanisms offered. In a (subgame perfect) equilibrium of this market, sellers hold auctions with an efficient reserve price but charge an entry fee. The entry fee depends on the number of buyers and sellers, the distribution of buyer valuations, and the buyer cost of entering the market. As the size of the market increases, the entry fee decreases and converges to zero in the limit. We study how the surplus of buyers and sellers depends on the number of agents on each side of the market in this decentralized trading environment.     

Manipulation and the Allocational Role of Prices

It is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources. This paper identifies a limitation inherent in this role of prices. It shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm's stock. When this happens the informativeness of the stock price decreases, and the beneficial allocational role of the financial market weakens. The trader profits from this trading strategy, partly because his trading distorts the firm's investment. We therefore refer to this strategy as manipulation . We show that trading without information is profitable only with sell orders, driving a wedge between the allocational implications of buyer and seller initiated speculation, and providing justification for restrictions on short sales.     

Indeterminacy and directed search

The directed search approach assumes each seller posts a fixed price and, ex post, randomly allocates the good should more than one buyer desire the good. This paper assumes sellers can post prices which are contingent on ex post realized demand; e.g. an advertisement might state the Bertrand price should there be more than one buyer, which corresponds to an auction outcome. Competition in fixed prices and ex post rationing describes equilibrium behavior. There is also real market indeterminacy: a continuum of equilibria exists which are not payoff equivalent. Sellers prefer the equilibrium in auctions.     

Auctions with Price-Proportional Benefits to Bidders

After some auctions, including Amish estate sales and buyer rings′ knockout auctions, each bidder receives a share of the revenue generated by the auction. We show that in the symmetric case, equilibrium bids in both first-price sealed-bid auctions and oral auctions increase as each bidder′s share increases. In the case of independent signals, oral auctions result in higher expected equilibrium prices than do first-price sealed-bid auctions. Journal of Economic, Literature classification number: D44.     

关于保险市场道德风险的微观经济学问题研究

保险市场是一个典型的信息不对称市场,主要表现为道德风险问题,这种对信息占有的不对称状况,很容易被保险市场参与者所利用,并导致保险市场运行的低效率。目前,中国保险市场上保险公司和投保人之间的道德风险问题表现得比较突出,已经成为制约保险业可持续发展的一个重要因素。本文从理论角度研究道德风险问题产生的机制,梳理信息不对称问题在理论上的解决方法,并从中得到保险市场应对道德风险问题的建议。     

Art Auctions and Art Investment in the Golden Age of British Painting

We analyse the evolution of the price of paintings in London auctions with a unique data set of over 200,000 sales in the period 1780–1840. We build a price index for the representative painting through hedonic regressions controlling for the characteristics of auctions and paintings and for the artists’ fixed effects. The emergence of an efficient secondary art market was an important opportunity for portfolio diversification. Estimating a CAPM model for art investment suggests that British paintings could deliver a higher return compared to imported paintings and an attractive source of diversification relative to the contemporary stock market. This contributed to increase the demand for British art and, possibly, to promote the innovations of its Golden Age. While the representative painting of the British school was initially undervalued, new British painters reached foreign prices by the beginning of 1800s.     

Asymmetric Nash equilibrium in emission rights auctions

This paper studies the problems of emission rights auctions, and presents a uniform price auction mechanism based on three assumptions, i.e., all buyers are asymmetric, every buyer submits a nonincreasing continuous demand function, and every buyer's valuation to per unit of the emission rights is common value information. It focuses on solving the asymmetric Nash equilibrium for this auction mechanism. It concludes that there exist multiple Nash equilibria in our auction mechanism, but the arbitrary low equilibrium prices cannot emerge. We also give several suggestions on how to induce the auction to a desired ideal equilibrium state in mechanism design of emission rights auctions.     

REPUTATIONAL BIDDING

We consider auctions where bidders care about the reputational effects of their bidding and argue that the amount of information disclosed at the end of the auction will influence bidding. We focus on bid disclosure rules that capture all of the realistic cases. We show that bidders distort their bidding in a way that conforms to stylized facts about takeovers/licence auctions. We rank the disclosure rules in terms of their expected revenues and find that, under certain conditions, full disclosure will not be optimal. First‐price and second‐price auctions with price disclosure are not revenue equivalent and we rank them.     

价格信息成本与价格离中现象

该文在Varian(1980)中引入消费者价格信息成本和信息成本的分布,采用Janssen和Moraga(2000)的对称混合策略均衡定义,同时内生化了消费者的信息行为和厂商的定价行为,确定了Varian(1980)中的知情消费者比例,证明了厂商定价正期望利润均衡的存在性.该文证明了,在不完全价格信息条件下,市场普遍存在知情消费者,从而该文加强了Varian(1980)的结论.     

Does asymmetric information affect the premium in mergers and acquisitions?

We test the influence of information asymmetry on the premium paid for an acquisition. We analyze mergers and acquisitions as English auctions. The theory of dynamic auctions with private and common value predicts that more informed bidders may pay a lower price. We test that prediction with a sample of 1,026 acquisitions in the United States between 1990 and 2007. We assume that blockholders of the target's shares are better informed than other bidders because they possess privileged information on the target. Our empirical results show that blockholders pay a much lower premium than do other buyers     

Internet auctions with many traders

We study a multi-unit auction environment similar to eBay. Sellers, each with a single unit of a homogeneous good, set reserve prices at their own second-price auctions. Each buyer has private value for the good and wishes to acquire a single unit. Buyers can bid as often as they like and move between auctions. We characterize a perfect Bayesian equilibrium for this decentralized dynamic mechanism in which, conditional on reserve prices, an efficient set of trades occurs at a uniform price. In a large but finite market, the sellers set reserve prices equal to their true costs under a very mild distributional assumption, so ex post efficiency is achieved. Buyers’ strategies in this equilibrium are simple and do not depend on their beliefs about other buyers’ valuations, or the number of buyers and sellers.