A theory of search with deadlines and uncertain recall

By Nuray Akin and Brennan Platt

http://d.repec.org/n?u=RePEc:mia:wpaper:2012-3&r=dge

We analyze an equilibrium search model where buyers seek to purchase a good before a deadline and face uncertainty regarding the availability of past price quotes in the future. Sellers cannot observe a potential buyer’s remaining time until deadline nor his quote history, and hence post prices that weigh the probability of sale versus the profit once sold. The model’s equilibrium can take one of three forms. In a late equilibrium, buyers initially forgo purchases, preferring to wait until the deadline. In an early equilibrium, any equilibrium offer is accepted as soon as it is received. In a full equilibrium, higher prices are turned down until near the deadline, while lower prices are immediately accepted. Equilibrium price and sales dynamics are determined by the time remaining until the deadline and the quote history of the consumer.

Interesting theory that provides a new rationale for price dispersion. I wonder how it could explain stock market crashes and house price dynamics, the first because it involves fire sales, the second because deadlines are inherent in moving.