High profit equilibria in directed search models

We consider a model of directed search where the sellers are allowed to post mechanisms with entry fees. Regardless of the number of buyers and sellers, the sellers are able to extract all the surplus of the buyers by introducing entry fees and making price schedules positively sloped in the number of buyers arriving to their shops. This is in contrast to results that are achieved for large markets under the assumption that sellers cannot in‡uence the utility of any particular buyer (market utility assumption), in which case buyers obtain strictly positive rents. If there is a bound on the prices or on the entry fees that can be charged, then the equilibrium with full rent extraction does not exist any more, and the market utility assumption is restored for large markets. ∗I am grateful to Paulo Barelli, Jan Eeckhout, Stephan Lauermann and various audiences for their useful comments and the University of Michigan for its hospitality. All remaining errors are mine. †University of Rochester, Economics Department, 222 Harkness Hall, NY14627, e-mail: [email protected]