Selling Formats for Search Goods

Abstract

The paper offers a comparative analysis of different ways to sell products (selling formats) when buyers incur evaluation costs. Since these costs are sunk at the moment of trade, buyers may refrain from incurring them for fear of later opportunism on the part of sellers. It is found that the use of many common selling formats can be explained in terms of their ability to alleviate this problem. Specifically, I explain price advertising, seller colocation, and bargaining. The theory explains much of the divergence in retail trading institutions and leads to several testable predictions.