The Gains from Trade Under Fixed Price Mechanisms

Abstract

must interfere with efficient exchange when a buyer and seller have independently distributed private information and there is a nontrivial exchange problem. I bound the losses associated with private information based on a simple characteristic for of the distributions. When the median of the seller’s cost is less than the median of the buyer’s value, the maximal loss is one half of the full information gains from trade. As a fraction of the possible gains from trade, the losses tend to be greatest precisely when seller is likely to have high costs, and thus when the overall gains from trade are small. 1 In a hugely important article, Roger Myerson and Mark Satterthwaite demonstrate that if a buyer and seller have independently distributed, privately observed valuations for an indivisible good, and there is no source of external subsidy, then it is not possible to arrange efficient trade. This is an important theorem because it shows that information is a barrier to efficient exchange, and indeed the distribution of information acts like a constraint analogous to a resource or scarcity constraint. Moreover, the problem posed is a conventional bilateral bargaining problem, with the reasonable assumption that the seller is uncertain about the buyer’s value and vice-versa. The only distributional

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