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10 - Market Institutions

Published online by Cambridge University Press:  05 August 2013

Sushil Bikhchandani ,
Jack Hirshleifer  and
John G. Riley
Sushil Bikhchandani
Affiliation:
University of California, Los Angeles
John G. Riley
Affiliation:
University of California, Los Angeles
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Summary

Market institutions come into place to solve extant problems. For example, with the advent of large corporations and multi-location merchandising in the early nineteenth century, posted prices replaced bargaining as the preferred method of retail. More recently, prompted by advances in technology, which make it possible to serve geographically-dispersed bidders, auctions have increased in popularity. At the same time, in transactions involving real estate or cars, prices are determined through negotiations. In this chapter we explore some of the reasons underlying this variety of selling methods. In Sections 10.1 and 10.2 we assume that the seller has the ability to choose and commit to any selling method she likes. Under this assumption, the seller will find it optimal to either post a take-it-or-leave-it price or conduct an auction. When this assumption is relaxed (in Section 10.3), it leads to bargaining between the seller and the buyer.

Posted-Price Markets

A seller has one indivisible object to sell to a buyer. The seller's cost is normalized to zero. The buyer values the object at V ⩾ 0. The seller does not know V and believes that it is drawn from a probability distribution F(V) with positive density f(V). The seller has the power to decide how to sell the object and can choose any market institution that she likes. What should the seller do?

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The Analytics of Uncertainty and Information , pp. 367 - 421
Publisher: Cambridge University Press
Print publication year: 2013

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