Market Mechanism Choice with Time Preference: Posted Price versus Auction

Abstract

I propose a one‐period model of transaction mechanism choices between a posted price market and an auction market, considering agents’ time preference. Buyers with low search costs search in the posted price market and purchase the products at the beginning of the period. Buyers with high search costs participate in the auction market and get the products at the end of the period. It is shown that there are equilibrium numbers of buyers and sellers in each market, where agents cannot benefit from deviating from their choices, under an assumption about the distribution of buyers and sellers. In addition, when the agents are impatient, some of the listed prices may be higher than the expected winning bid. Moreover, the expected listed price in the search market may be higher than the expected winning bid in the auction market, when the agents are very impatient. It is also shown that the expected winning bid is lower than the expected listed price when buyers and/or sellers have uniformly distributed discount factors.