Theoretical Economics 10 (2015), 341–383
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Transparency and price formation
Ayça Kaya, Qingmin Liu
Abstract
We study the role that price transparency plays in determining the
efficiency and surplus division in a sequential bargaining model of price
formation with asymmetric information. Under natural assumptions on type
distributions, and for any discount factor, we show that the unobservability
of past negotiations leads to lower prices and faster trading.
Unobservability therefore enhances the ``Coasian effect" by
fostering efficiency and diverting more of the surplus to the player who
possesses private information. In addition, we show that the equilibrium is
unique and is in pure strategies in the non-transparent regime; this stands
in sharp contrast to the existing literature and allows for a better
understanding of the Coasian effect and price observability.
Keywords: Coase conjecture, bargaining, durable goods monopoly, incomplete information, price formation, transparency
JEL classification: C61, C73, C78
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