A Theory of Commerce: Competitive Search Under Private Information

Abstract

Retail trade absorbs vast scarce resources because the physical process of trading is time con-suming, buyers match with sellers without coordination, and consumers prefer to purchase a diverse basket of goods. Sellers post prices to attract customers, but buyers care also about the expected time it takes to make a purchase. Retail prices can be non-linear due to packaging and quantity discounts. However, prices cannot depend on buyers preferences because these are private information. To capture these features, we adopt directed search and assume that sellers ignore their clients preferences. If, realistically, sellers cannot charge a ßat fee to all potential buyers, then in equilibrium the average lineup of buyers in front of a seller is inefficiently long. In contrast, the directed search equilibrium is efficient with full information. Our model is easily inserted in a Neoclassical growth framework. The retail trade sector can be calibrated using commercial margins and resources employed in that sector.