A Structural Model of Competing Sellers: Auctions and Posted Prices

37 Pages Posted: 4 Nov 2012

Date Written: October 31, 2012

Abstract

In an original data set of goods listed for sale online, I observe that both auctions and posted prices are popular with buyers and sellers in the compact-disc market. To explain why these two mechanisms coexist, I estimate a structural model of competing sellers who differ in the value of their outside options. Buyers are allowed to value auctioned and posted-price goods differently but the estimated value distributions suggest that differences across buyers do not explain the mechanism coexistence that I observe. In contrast, differences across sellers' outside options are important: the value of the outside option segments the market with high outside-option sellers choosing to post a fixed price. There are two key forces at work that drive this empirical result. First, competition between sellers favors coexistence over an auction-only or a posted-price-only marketplace because sellers prefer to be in a market with fewer rivals. Second, sellers with more valuable outside options prefer the posted-price mechanism because posted-price goods sell less often than auctioned goods but at a higher price. As a result, a larger outside option reduces the loss from not selling and favors the posted-price mechanism.

Keywords: Auction, posted price, competing sellers, outside option

JEL Classification: L11, D44, D43

Suggested Citation

Hammond, Robert G., A Structural Model of Competing Sellers: Auctions and Posted Prices (October 31, 2012). Available at SSRN: https://ssrn.com/abstract=2170850 or http://dx.doi.org/10.2139/ssrn.2170850

Robert G. Hammond (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695-8110
United States

HOME PAGE: http://www4.ncsu.edu/~rghammon/

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