Auctions and Posted Prices in Directed Search Equilibrium

Abstract

We compare equilibrium allocations in directed search models where prices are determined alternatively by posting and by competing auctions, with the following results. With finite numbers of players, sellers' expected payoffs are higher when all sellers auction than when all sellers post. This difference is largest in the 2-by-2 case, where payoffs to sellers are 1/3 higher if they auction. The difference in the payoffs decreases rapidly with market size and vanishes in the limit "large" economy. When sellers can choose whether to post prices or auction in the 2-by-2-case, all combinations (auction-auction, post-post, and auction-post) can occur in equilibrium if sellers choose mechanism and price simultaneously. However, if sellers choose mechanism before price then the dominant strategy equilibrium has both sellers auctioning.

Informative Advertising in Directed Search

“…14 Similarly as in the last section with the auction mechanism, we explore the large market property of the equilibrium price and advertising intensity. We are especially interested in the relation between equilibrium advertising intensity and market tightness, and also the comparison between the equilibrium advertising intensities under auction mechanism and under price-posting.…”

The Assignment of Workers to Jobs in an Economy with Coordination Frictions

“…Thus equation (7) suggests that existing results on the equivalence between auctions and ex ante wage commitments (e.g. Kultti 1999, Julien, Kennes, andKing 2001) should extend to environments with heterogeneous workers and firms.…”

Price Dispersion with Directed Search

“…For example see Bester (1994), with search and commitment costs, or Camera and Delacroix (2004), with random matching and heterogeneous buyers. Examples with directed search include Peters (1991), where bargaining is not a stable institution since sellers may benefit from price posting; in McAfee (1993), sellers compete in mechanisms and in equilibrium use identical auctions; Julien, Kennes, and King (2001) compares equilibria when prices are determined by posting or by competing auctions; in Acemoglu and Shimer (1999) and Michelacci and Suarez (2006) vacancies choose between posting a wage or bargaining ex post with heterogeneous workers.…”