Search at the Margin
American Economic Review · 2017 · Volume 107 · Issue 10
Abstract
We extend search theory to multiple indivisible units and perfectly divisible assets, solving them respectively with induction and recursion. Buyer demands and prices are random, and the seller can partially exercise orders. With divisible assets, the Bellman value function is increasing and strictly concave, and the optimal reservation price falls in the position, reflecting increasing holding costs (opportunity cost of delaying optionality for inframarginal units). The marginal value exists, and is strictly convex with a falling purchase cap density. Our model is amenable to price-quantity bargaining; e.g., greater buyer bargaining power is tantamount to greater search frictions.
Keywords
Optimization Techniques, Programming Models, Dynamic Analysis, Bargaining Theory, Matching Theory, Intertemporal Firm Choice: Investment, Capacity, and Financing, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Capital Budgeting, Fixed Investment and Inventory Studies
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