A structural model of competing sellers: Auctions and posted prices

In an original data set of goods listed for sale online, I observe that both auctions and posted prices are popular with buyers and sellers in the compact-disc market. To explain why these two mechanisms coexist, I estimate a structural model of competing sellers who differ in the value of their outside options. Buyers are allowed to value auctioned and posted-price goods differently but the estimated value distributions suggest that differences across buyers do not explain the mechanism coexistence that I observe. In contrast, differences across sellers' outside options are important: the value of the outside option segments the market with high outside-option sellers choosing to post a fixed price. There are two key forces at work that drive this empirical result. First, competition between sellers favors coexistence over an auction-only or a posted-price-only marketplace because sellers prefer to be in a market with fewer rivals. Second, sellers with more valuable outside options prefer the posted-price mechanism because posted-price goods sell less often than auctioned goods but at a higher price. As a result, a larger outside option reduces the loss from not selling and favors the posted-price mechanism.