Selecting a Selling Institution: Auctions versus Sequential Search

Under conditions of asymmetric information, the seller's choice of a selling institution entails sorting of buyers by valuation type in order to price discriminate and maximize profits. We consider the seller's choice between sequential search and an auction in the presence of discounting and transaction costs when selling n homogeneous units of a good. Our analysis shows that the expected return per unit from sequential selling decreases in n. For the auction with suitable restrictions, the expected return per unit is increasing in n. Thus, when choosing between sequential * This research was supported in part by the UCLA Price Institute Program in Entrepreneurial Studies. search and an auction, sequential search is the preferred institution if n is small (<n) whereas the auction is preferred if n is large (≥n). By considering historical details of the evolution of livestock markets, our results explain and comport with empirical reality.