American Economic Review: Vol. 97 No. 1 (March 2007)
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Credible Sales Mechanisms and Intermediaries
McAdams, David, and Michael Schwarz. 2007. "Credible Sales Mechanisms and Intermediaries." American Economic Review, 97(1): 260-276.
We consider a seller who faces several buyers and lacks access to an institution to credibly close a sale. If buyers anticipate that the seller may negotiate further, they will prefer to wait before making their best and final offers. This in turn induces the seller to bargain at length with buyers, even if doing so is costly. When the seller's cost of soliciting another round of offers is either very large or very small, the seller credibly commits to an auction and experiences negligible bargaining costs. Otherwise, there may be several rounds of increasing offers and significant seller losses. In these situations, an intermediary with a sufficiently valuable reputation and/or weak marginal incentives regarding price can create value by credibly committing to help sell the object without delay. (JEL C78, D44)
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