PRICE COMMITMENT IN SEARCH MARKETS

This paper studies the formation of pricing rules in search markets. At a cost, each seller can commit himself to a fixed price. It he takes no actions to preclude haggling, his sales price is determined through bilateral negotiations with the buyer. The selection of pricing rules exhibits strategic complementarities that may give rise to multiple equilibria. Differences in trading practices across countries and cultures may thus be consistent with equilibrium behavior. In bazaar markets, where the buyer's cost of switching sellers is relatively low, most of the trade is conducted via bargaining and prices are close to the perfectly competitive outcome.