Posted vs. Negotiated Prices under Incomplete Information

Paper number: 96/03

Paper date: February 1996

Year: 1996

Paper Category: Discussion Paper

Authors

Piergiovanna Natale*
Università Cattolica del Sacro Cuore, Milano

Abstract

This paper addresses the issue of selecting pricing institutions in a bilateral monopoly. Suppose a buyer and seller can benefit from exchanging one unit of a good. The seller is entitled to select the pricing institution. He can either make a take-it-or-leave-it offer or enter a bargaining game. Under incomplete information, a take-it-or-leave-it offer performs two tasks. When informaion is one-sided incomplete, it prevents the occurrence of a Coase conjecture outcome. When uncertainty is two-sided, it signals the seller's cost in providing the good. Thus, a seller who finds it unprofitable to commit under one-sided incomplete information, may be prepared to do so when the buyer is uncertain about his type. This leads to conclude that pricing institutions are endogeneous with respect to the information available to the trading parties.

JEL Classification Nos: D49, D82
Keywords: Incomplete information, Bargaining, Pricing Institutions

Corresponding Author:Piergiovanna Natale, Universita Cattolica, L.go Gemelli1, 20123 Milano, Italy

 


*I wish to thank Monica Giulietti, Guido Merzoni and especially David de Meza for many helpful discussions. This paper was written while I was visiting the Economics Department at the University of Exeter. I am grateful to all members of the Department and in particular to John Black and Mark Blaug for their kind hospitality. Financial support from the C.N.R. is acknowledged.