On the Formation of Buyer-Seller Relationships When Product Quality is Perfectly Observable

CIRPEE Working Paper No. 07-40

39 Pages Posted: 12 Nov 2007

See all articles by Yann Bramoulle

Yann Bramoulle

Université Laval - Département d'Économique

John A. List

University of Chicago - Department of Economics

Michael K. Price

University of Nevada, Reno

Date Written: November 2007

Abstract

This study explores the formation of buyer-seller relationships in markets with observable quality. We develop a model that explains why relationships form in equilibrium within such markets. A key feature of our model is that as individuals gain experience in the marketplace, they resolve uncertainty over unobserved bargainer types. Relationships thus form as a means to reduce such transactions costs and uncertainty. We explore the usefulness of our theory by using a battery of simulations and experimental treatments. Overall, we find that our theoretical predictions are largely confirmed. Interestingly, the quantitative impact of relationships on overall market efficiency depends critically on the extent to which market structure affects the matching of buyers and sellers that could profitably transact. In certain important cases, a greater number of buyer-seller relationships can reduce market efficiency.

Keywords: Field experiments, pricing, market structure

JEL Classification: C93, D4

Suggested Citation

Bramoulle, Yann and List, John A. and Price, Michael K., On the Formation of Buyer-Seller Relationships When Product Quality is Perfectly Observable (November 2007). CIRPEE Working Paper No. 07-40, Available at SSRN: https://ssrn.com/abstract=1028541 or http://dx.doi.org/10.2139/ssrn.1028541

Yann Bramoulle

Université Laval - Département d'Économique ( email )

Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada

John A. List

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Michael K. Price (Contact Author)

University of Nevada, Reno ( email )

1664 N. Virginia St
Reno, NV 89557
United States

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