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Trading Mechanism Selection with Directed Search when Buyers are Risk Averse

Selcuk, Cemil (2011): Trading Mechanism Selection with Directed Search when Buyers are Risk Averse. Forthcoming in: Economics Letters

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Abstract

We endogenize the trading mechanism selection in a model of directed search with risk averse buyers and show that the unique symmetric equilibrium entails all sellers using fixed price trading. Mechanisms that prescribe the sale price as a function of the realized demand (auctions, bargaining, discount pricing, etc.) expose buyers to the "price risk", the uncertainty of not knowing how much to pay in advance. Fixed price trading eliminates the price risk, which is why risk averse customers accept paying more to shop at such stores.

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