We present a model that generates empirically plausible price distributions in directed search equilibrium. There are many identical buyers and many identical capacity‐constrained sellers who post prices. These prices can be renegotiated to some degree and the outcome depends on the number of buyers who want to purchase the good. In equilibrium all sellers post the same price, demand is randomly distributed, and there is sale price dispersion. Prices and distributions depend on market tightness and on the properties of renegotiation outcomes. In a labor market context, the model generates a strong empirical prediction. If workers can renegotiate the posted wage, then the model predicts a positively skewed and realistic‐looking density function of realized wages when the mean number of job‐seekers per vacancy is large. (JEL: C780, D390, D490, E390)
We present a model that generates empirically plausible price distributions in directed search equilibrium. There are many identical buyers and many identical capacity-constrained sellers who post prices. These prices can be renegotiated to some degree and the outcome depends on the number of buyers who want to purchase the good. In equilibrium all sellers post the same price, demand is randomly distributed, and there is sale price dispersion. Prices and distributions depend on market tightness and on the properties of renegotiation outcomes. In a labor market context, the model generates a strong empirical prediction. If workers can renegotiate the posted wage, then the model predicts a positively skewed and realistic-looking density function of realized wages when the mean number of job-seekers per vacancy is large. (JEL: C780, D390, D490, E390) Toronto, the Federal Reserve Bank of New York and several universities, including Indiana, Iowa, Manchester, Purdue, Queen's, and Vanderbilt.
Abstract:We develop an equilibrium search model of the housing market where sellers may become distressed as they are unable to sell. A unique steady state equilibrium exists where distressed sellers attempt liquidation sales by accepting prices that are substantially below fundamental values.During periods where a large number of sellers are forced to liquidate customers exhibit 'predation': they hold o¤ purchasing and strategically slow down the speed of trade, which in turn causes more sellers to become distressed. The model naturally suggests several proxies of liquidity. Interestingly, the average time on the market (TOM), one of the most frequently used statistics in the literature, does a poor job within the context of liquidation sales and predation. Speci…cally we show that TOM falls during periods of predatory buying, which, if interpreted on face value, indicates that the market becomes more liquid with predation. We propose an alternative proxy-the pro…t loss in …re sales-which appears to be a more robust measure of liquidity than TOM.
+44 (0)29 2087 0831A : We endogenize the trading mechanism selection in a model of directed search with risk averse buyers and show that the unique symmetric equilibrium entails all sellers using fixed price trading. Mechanisms that prescribe the sale price as a function of the realized demand (auctions, bargaining, discount pricing, etc.) expose buyers to the "price risk", the uncertainty of not knowing how much to pay in advance. Fixed price trading eliminates the price risk, which is why risk averse customers accept paying more to shop at such stores.
We study the selection and dynamics of two popular pricing policies-…xed price and ‡exible price-in competitive markets. Our paper extends previous work in marketing, e.g. Desai and Purohit (2004) by focusing on decentralized markets with a dynamic and fully competitive framework while also considering possible non-economic aspects of bargaining. We construct and analyze a competitive search model which allows us to endogenize the expected demand depending on pricing rules and posted prices. Our analysis reveals that …xed and ‡exible pricing policies generally coexist in the same marketplace, and each policy comes with its own list price and customer demographics. More speci…cally, if customers dislike haggling, then …xed pricing emerges as the unique equilibrium, but if customers get some additional satisfaction from the bargaining process, then both policies are o¤ered, and the unique equilibrium exhibits full segmentation: Haggler customers avoid …xed-price …rms and exclusively shop at ‡exible …rms whereas non-haggler customers do the opposite. We also …nd that prices increase in customer satisfaction, implying that sellers take advantage of the positive utility enjoyed by hagglers in the form of higher prices. Finally, considering the presence of seasonal cycles in most markets, we analyze a scenario where market demand goes through periodic ups and downs and …nd that equilibrium prices remain mostly stable despite signi…cant ‡uctuations in demand. This …nding suggests a plausible competition-based explanation for the stability of prices.
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