Posted Prices Versus Bargaining in Markets With Asymmetric Information

A search model is employed to analyze the choice between posting a price and bargaining for the seller of an asset who is imperfectly informed about both buyer valuations and buyer bargaining abilities. A mean preserving increase in risk of buyer valuations is relevant (and beneficial) to the seller; however, only the mean ȳ (and not the distribution) of buyer bargaining abilities is relevant. If ȳ is sufficiently high, the seller utilizes a posted price. Interestingly, social welfare decreases in ȳ while an increase in ȳ reduces expected search costs, it also results in misallocation of the good because the seller is less discriminating. ( JEL D42, D83)