Search, Bargaining and Optimal Asking Prices

Abstract

This paper analyzes a search‐and‐bargaining model in which the asking price influences the rate at which potential customers arrive to inspect the seller's house, and the buyer's valuation of the asset is not learned until after the seller makes his initial offer (the asking price). The optimal asking and reservation prices are characterized, and the existence of a subgame‐perfect equilibrium asking‐price—reservation‐price strategy is established. Comparative‐statics analysis illustrates how seller and buyer discount rates and the buyer's outside opportunity affect the optimal reservation and asking prices.