Pricing, signalling, and sorting with frictions (2019), with Klaus Kultti and Tuomo Virkola, The B.E. Journal of Theoretical Economics, accepted for publication.
We analyse signalling and sorting in a market with frictions and private information. Buyers are heterogeneous, the sellers choose what quality to produce and post prices. Buyers do not observe quality, but infer it from prices. In equilibrium high-quality sellers signal quality with a price that is higher than under perfect information. Compared to the outcome under perfect information the higher price has two eﬀects. First, it makes production of high-quality goods more attractive increasing its supply. Second, it makes high-valuation buyers worse-oﬀ, directing part of them to low-quality sellers. We determine which eﬀect dominates; whether too many or too few sellers produce high quality. We also show that the prices of both high- and low-quality goods are higher, and the sellers do better and the buyers worse under private information. In addition, we show that an increase in the production cost of high quality may lead to higher proﬁts and prices.
Keywords: Heterogeneous buyers, endogenous types, signalling, sorting, directed search
JEL Classification: D8, C78
Directed search with divisible goods (December 2016)
We study a large frictional economy where sellers choose capacities and post prices or auctions to attract buyers. The difference to earlier literature is that the traded good is perfectly divisible and that each buyer can acquire fractional units if he is unable to secure a whole unit. We derive the equilibrium prices and capacities under constant marginal utility and confirm that equilibrium is constrained efficient. Under decreasing marginal utilities fixed prices are no longer constrained efficient unlike trading mechanisms that are pay-off equivalent to multi-unit Vickrey auctions.
Keywords: Directed search, perfectly divisible goods, multi-unit auction
Convergence of Finite Clustered Markets (with Klaus Kultti)
We demonstrate that a clustered market with a finite number of buyers and capacity constrained sellers in the same location, and with demand uncertainty, has a unique symmetric equilibrium where the sellers use mixed strategies in pricing. As the economy grows the mixed strategy and the demand uncertainty converge to those of an economy with continua of buyers and sellers. Thus, using the simplifying assumption of a continuum of agents is well founded when analyzing this market structure.
Pricing and Market Structure (with Klaus Kultti)
We derive the equilibrium pricing strategies under three often observed market structures in a model with one large firm and a competitive fringe of small capacity constrained firms under uncertain demand. The pricing strategies reflect the varying levels of frictions and within location competition induced by the market structures. An implication of the complexity of the pricing strategies is that a sample of posted prices and a simple index based on these is not enough for comparing the market structures in terms of expected prices paid. Knowledge of the market structure and expected demand is needed as well.
Keywords: Firm location, market structure, firm size
JEL Classification: D43, L10, L13
Work in progress:
Counterfeit goods and signaling in a dispersed market
Competitive non-linear pricing with congestion (with Saara Hämäläinen)
Directed Search in a Large Housing Market with Learning
Peer Reviewed Publications:
Godenhielm M., K. Kultti and T. Virkola 2019. "Pricing, signalling, and sorting with frictions" , The B.E. Journal of Theoretical Economics (BEJTE), accepted for publication.
Godenhielm M. and K. Kultti 2014. "Capacity Choice in a Large Market," PLoS ONE 9(8): e101766, doi:10.1371/journal.pone.0101766.
Godenhielm M. and K. Kultti 2008. "In a Herd? Herding With Costly Observation and an Unknown Number of Predecessors," Finnish Economic Papers, vol. 21(2), pages 95-103, Autumn.
Godenhielm, M., 2012. Firm Size Matters, Ph.D. Thesis, Dissertationes Oeconomicae, University of Helsinki.
Godenhielm M., 2013. “Yritysten koko etsintämalleissa,” Kansantaloudellinen aikakausikirja, 109 vsk., 2/2013.