MEETINGS AND MECHANISMS

This article shows how meeting frictions affect equilibrium trading mechanisms and allocations in an environment where identical sellers post mechanisms to compete for buyers with ex ante heterogeneous private valuations. Multiple submarkets can emerge, each consisting of all sellers posting a particular mechanism and the buyers who visit those sellers. Under mild conditions, high-valuation buyers are all located in the same submarket, and low valuation buyers can be in: (i) the same submarket, (ii) a different submarket, and (iii) a mixture of (i) and (ii). The decentralized equilibrium is efficient when sellers can post auctions with reserve prices or entry fees.     

Remain silent and ye shall suffer: seller exploitation of reticent buyers in an experimental reputation system

By providing incentives for sellers to act in a trustworthy manner, reputation mechanisms can mitigate moral-hazard problems when particular buyers and sellers interact infrequently. However, these mechanisms rely on buyers sharing their private information about sellers, and thus may suffer from too little feedback when provision is costly. We experimentally compare a standard feedback mechanism to one in which sellers can inspect a buyer’s feedback-provision history, thus providing incentives to share private information even when costly. We find fairly high trust and trustworthiness in all markets, with buyers providing costly feedback, especially negative, sufficient to induce trustworthiness. However, feedback-provision histories did not improve outcomes, and at least weakly decreased trustworthiness with experienced participants, as this information enabled sellers to discriminate and ship less frequently to buyers lacking a reputation for information sharing.     

Disapproval aversion or inflated inequity acceptance? The impact of expressing emotions in ultimatum bargaining

Past experimental research has shown that when rating systems are available, buyers are more generous in accepting unfair offers in ultimatum bargaining. However, it also suggests that, under these conditions, sellers behave more fairly to avoid receiving negative feedback. This paper experimentally investigates which effect is stronger with the use of a rating system: buyers’ inflated inequity acceptance or sellers’ disapproval aversion. We explore this question by varying the information condition on the buyers’ side. Our experiment shows that in a setup where the size of the pie is common knowledge for both buyers and sellers, when a rating system is present, the sellers exhibit disapproval aversion but the buyers do not display greater acceptance of inequity. By contrast, when only sellers are aware of the size of the pie, sellers behave aggressively to exploit buyers and their behavior does not change in the presence of a rating system; however, buyers display greater acceptance of inequity when a rating system is present. We discuss how these results can be explained by a theoretical model that includes sellers’ social disapproval aversion and buyers’ disappointment aversion in addition to the players’ inequality aversion.     

Estimation of hedonic price functions with incomplete information

Existence of persistent price dispersion suggests that some buyers find lower prices through search and information acquisition, while some sellers charge higher prices by gathering information on potential buyers. If buyers are not fully informed of the lowest price available in the market they end up paying a price higher than if they had full information. Similarly, if sellers are not fully informed about the highest price they could charge, they too suffer by receiving a price lower than had they had full information. This paper develops a hedonic price model that incorporates the effects of incomplete information on both sides of the market and obtains estimates of the discrepancies between market prices and buyers’ maximum willingness to pay and sellers’ minimum willingness to accept. Correlates of such price discrepancies are also explored. We apply the technique to a data set constructed from the American Housing Survey, and find that incomplete information has had a significant impact on housing prices.     

Platform competition and seller investment incentives

Many products and services are not sold on open platforms but on competing for-profit platforms, which charge buyers and sellers for access. What is the effect of for-profit intermediation on seller investment incentives? Since for-profit intermediaries reduce the available rents in the market, one might naively suspect that sellers have weaker investment incentives with competing for-profit platforms. However, we show that for-profit intermediation may lead to overinvestment when free access would lead to underinvestment because investment decisions affect the strength of indirect network effects and, thus, access prices. We characterize the effect of for-profit intermediation on investment incentives depending on the nature of the investment and on which side of the market singlehomes.     

Imperfect Competition in Auction Designs

We study the competition between two owners of identical goods who wish to sell them to a pool of potential buyers. The sellers compete simultaneously setting reserve prices for their second price sealed bid auctions. Upon observing the set reserve prices, the buyers decide simultaneously in which auction to bid. We show that this game has (at least) one equilibrium and that all equilibria are inefficient: reserve prices are not driven to zero (cost). We also discuss where and why the parallel between optimal auction design and optimal pricing in the case of monopoly breaks down for oligopoly.     

A note on Peters and Severinov, “Competition among sellers who offer auctions instead of prices”

We consider a market in which sellers compete for buyers by advertising reserve prices for second-price auctions. Applying the limit equilibrium concept developed in Peters and Severinov (1997) [1], we show that the competitive matching equilibrium is characterized by a reserve price of zero. This corrects a result in Peters and Severinov (1997) [1].     

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.     

High profit equilibria in directed search models

We consider a model of directed search where the sellers are allowed to post mechanisms with entry fees. Regardless of the number of buyers and sellers, the sellers are able to extract all the surplus of the buyers by introducing entry fees and making price schedules positively sloped in the number of buyers arriving to their shops. This is in contrast to results that are achieved for large markets under the assumption that sellers cannot influence the utility of any particular buyer (market utility assumption), in which case buyers obtain strictly positive rents. If there is a bound on the prices or on the entry fees that can be charged, then the equilibrium with full rent extraction does not exist any more, and the market utility assumption is restored for large markets.     

WHO SEARCHES?*

We consider a directed search model with buyers and sellers and determine whether buyers look for sellers or vice versa. The buyers and sellers can choose to search or wait; what they do in equilibrium depends on the relative size of the two populations and the price formation mechanism. We study bargaining and auctions and find that when one population is much larger than the other the former searches and the latter waits. Under auction with roughly equal populations some buyers and sellers search and some wait. Our results challenge the practice of postulating who searches and who waits.     

Option to wait in a search model

We consider a standard search model with buyers and sellers. Upon meeting the buyers make a take-it-or-leave-it offer, but the sellers have an option not to trade immediately but wait for more agents to appear. If more buyers come, there is excess demand, and the buyers engage in auction to get the good. Analogously, if more sellers come, the sellers engage in a Bertrand-type pricing game to sell the object. The option to wait restricts the price offer of the buyer; in an equilibrium in which trades are consummated without delay there is a unique price offer for the buyer.JEL Classification: C78, D44, D831     

Low price signals high capacity

We study pricing in a model where buyers are homogeneous and sellers have either capacity one or two. We show that if buyers observe prices but not capacities then an equilibrium exists where sellers of capacity two post lower prices than sellers of capacity one. The equilibrium satisfies the intuitive criterion.     

A MARKET WITH FRICTIONS IN THE MATCHING PROCESS: AN EXPERIMENTAL STUDY*

We construct a laboratory market in which there is a friction in the matching between buyers and sellers. Sellers simultaneously post prices and then buyers simultaneously choose a seller. If more than one buyer chooses the same seller, the seller's single unit is randomly sold to one of them. Our results show a broad consistency with theoretical predictions, although price dispersion exists and is slow to decay. Prices also exceed the equilibrium level when there are only two sellers, and buyers' purchase probabilities are insufficiently responsive to price differences when there are two sellers.     

Sequential Procurement With Subcontracting

Two symmetric sellers are approached sequentially by fragmented buyers. Each buyer conducts a second-price auction and purchases from the seller who offers the lower price. Winning an auction affects bidding for future contracts because the sellers have nonconstant marginal costs. We assume that the sellers are completely informed, and we study the unique equilibrium that survives iterated elimination of weakly dominated strategies. If subcontracting between the sellers is impossible, the final allocation of contracts is generally inefficient. If postauction subcontracting is possible, the sellers can be worse off, ex ante , than when subcontracting is impossible.     

Price discrimination of buyers with identical preferences and collusion in a model of advertising

A model of advertising and price distributions is investigated whereby each seller can contact different buyers, whose preferences are identical, with different probabilities. The model features a continuum of equilibria parametrized by the ratio of the buyers contacted by one seller—differing across “market segments”—and by the other sellers. In general, the sellers practice price discrimination across segments. More asymmetric equilibria correspond to higher volumes of transactions and higher expected transaction prices. This results in a lower expected utility for the buyers and higher expected profits; thus, identifying areas of influence can help the sellers to support collusion.     

ADVERSE SELECTION IN DYNAMIC MATCHING MARKETS

We study the Akerlofian adverse selection problem in a dynamic matching model where the competitive situation varies across different meetings. The ‘lemons principle’ is shown to limit the high quality sales within a wider range of quality distributions than in the Walrasian benchmark. High quality goods can nevertheless be traded, albeit less frequently than the low quality goods. For certain quality distributions, there exists a ‘partially pooling’ steady state where high quality sellers are active whenever at least two buyers compete for the good. Otherwise, the model features cycles in a sense that high quality goods are traded only in non‐consecutive periods.     

CONTINGENT PRICES AND MONEY*

Price posting with directed search is a widely used trading mechanism. Coles and Eeckhout showed that if sellers are allowed to post prices contingent on realized demand instead of one price, then there is real market indeterminacy. In this article, we fit this contingent price‐posting protocol into a monetary economy. We show that, as long as holding money is costly, there exists a unique equilibrium rather than a continuum. In this equilibrium sellers post a low price for when the buyer is alone, a high price for when several buyers show up, and buyers randomize between sellers and money holdings.     

Buyer groups as strategic commitments

Buyer cooperatives, buyer alliances, and horizontal mergers are often perceived as attempts to increase buyer power. In contrast to prior research emphasizing group size, I show that even small buyer groups composed of buyers with heterogeneous preferences can increase price competition among rival sellers by committing to purchase exclusively from one seller. Without transfer payments, at least one buyer group exists for each pair of sellers and buyer groups membership is chosen to achieve indifference between the two sellers. With transfer payments, and just two sellers, the grand coalition is a coalition-proof subgame perfect equilibrium (CP-SPNE), though equilibria with arbitrarily many buyer groups also exist. With three sellers (and with more sellers when the distribution of buyers is symmetric), a CP-SPNE always exists, all coalition-proof equilibria are payoff equivalent and have at least one buyer group for each pair of firms, so the grand coalition is not an equilibrium.     

Trading networks with price-setting agents

In a wide range of markets, individual buyers and sellers trade through intermediaries, who determine prices via strategic considerations. Typically, not all buyers and sellers have access to the same intermediaries, and they trade at correspondingly different prices that reflect their relative amounts of power in the market. We model this phenomenon using a game in which buyers, sellers, and traders engage in trade on a graph that represents the access each buyer and seller has to the traders. We show that the resulting game always has a subgame perfect Nash equilibrium, and that all equilibria lead to an efficient allocation of goods. Finally, we analyze trader profits in terms of the graph structure — roughly, a trader can command a positive profit if and only if it has an “essential” connection in the network, thus providing a graph-theoretic basis for quantifying the amount of competition among traders.     

An experimental comparison of two search models

Summary. We report an experiment designed to investigate markets with consumer search costs. In markets where buyers are matched with one seller at a time, sellers are predicted to sell at prices equal to buyers' valuations. However, we find sellers post prices that offer a more equal division of the surplus, and these prices tend to be accepted, while prices closer to the equilibrium prediction are rejected. At the other extreme, sellers are predicted to sell at a price equal to marginal cost when buyers are matched with two sellers at a time. Here, we find prices are closer to, but still significantly different from, the equilibrium prediction. Thus, our results support theoretical comparative static, but not point, predictions.