Repeated Trade With Imperfect Information About Previous Transactions

Francesc Dilmé

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: This paper studies repeated trade with noisy information about previous transactions. A buyer has private information about his willingness to pay, which is either low or high, and buys goods from different sellers over time. Each seller observes a noisy history of signals about the buyer’s previous purchases and sets a price. We compare the cases where previous prices are observable to sellers with the case where they are not. We show that more signal precision is counterbalanced by two equilibrium mechanisms that slow learning and keep incentives in balance: (1) sellers offer discounted prices more often, and (2) the buyer rejects high prices with a higher probability. The effect of making prices observable depends on the signal precision: When the signal is imprecise, making prices public strengthens the discounting mechanism, improving efficiency and buyer welfare; when the signal is precise, making prices public activates the rejection mechanism, and efficiency and buyer welfare may decrease. Independently of the price observability, the buyer tends to benefit from a more precise signal about previous purchases.

Keywords: Repeated Trade; Asymmetric Information; Internet Cookies (search for similar items in EconPapers)
JEL-codes: C73 C78 D82 (search for similar items in EconPapers)
Pages: 45
Date: 2024-04
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth and nep-mic
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