Posted Prices, Search and Bargaining

A model of a decentralized market is developed that features search frictions, advertised prices and bargaining. Sellers can post ask prices to attract buyers through a process of directed search, but ex post there is the possibility of negotiation. Similarly, buyers can post negotiable bid prices to attract sellers. Even when transaction prices often differ from quoted prices, bid and ask prices play a crucial role in directing search and reducing trading frictions. The theory provides insight about the prevalence of posted prices in the absence of full commitment by market participants to transact at the posted price. The features and predictions of the model align well with aspects of the secondary market for transferable taxicab license plates in Toronto. This provides a useful and unique context for studying the relationships between advertised and actual prices in a decentralized market. Journal of Economic Literature Classification: D40, G12, L10