Friday, April 12, 2013
Posted by D. Daniel Sokol
Benjamin R. Lester (Federal Reserve Bank of Philadelphia), Ludo Visschers (Universidad Carlos III de Madrid) and Ronald Wolthoff (University of Toronto) have a paper on Competing with Asking Prices.
ABSTRACT: In many markets, sellers advertise their good with an asking price. This is a price at which the seller is willing to 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 positive implications of this pricing mechanism for transaction prices and allocations.