Dynamic Relational Contracts under Complete Information

Benjamin Lester, Ludo Visschers and Ronald Wolthoff

No 2015-51, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: In many markets, sellers advertise their good with an asking price. This is a price at which the seller will take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalence in a variety of real world markets, asking prices have received little attention in the academic literature. We construct an environment with a few simple, realistic ingredients and demonstrate that using an asking price is optimal: it is the pricing mechanism that maximizes sellers' revenues and it implements the efficient outcome in equilibrium. We provide a complete characterization of this equilibrium and use it to explore the implications of this pricing mechanism for transaction prices and allocations.

Keywords: Asking Prices; Directed Search; Inspection Costs; Efficiency (search for similar items in EconPapers)
Date: 2015-05-26
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