A theory of commerce

The theory of commerce advanced here captures prominent features of retail trade: large employment, congestion effects, anonymous posted prices, and quantity discounts. This theory is built around a directed search model where buyers' preferences are private information. The analytical solution is easily inserted in a Neoclassical growth framework. In this framework, the parameters of retail trade are calibrated using commercial margins and employment. Welfare properties depend on the sellers' ability to charge two-tier prices. With two-tier prices, the directed search equilibrium is efficient. Otherwise, it is not. This contrasts with the full information benchmark, where directed search is always efficient. (c) 2004 Elsevier Inc. All rights reserved.