Auctions vs. fixed pricing: Competing for budget constrained buyers

We investigate price mechanism selection in a setting where sellers compete for budget constrained buyers by adopting either …xed pricing or auctions (…rst or second price). We show that …rst and second price auctions are payo¤ equivalent when some bidders are …nancially constrained, so sellers are indi¤erent to adopt either format. We fully characterize possible equilibria and show that if the budget is high, then sellers compete via …xed pricing, if it is low then they compete via auctions, and if it is moderate then they mix, so both mechanisms coexist. The budget constraint becomes less binding if sellers use entry fees. Interestingly an improvement of the budget— e.g. letting customers pay in installments— may lead to fewer trades and a loss of e¢ ciency.