10. Market Institutions, Prices and Distribution of Surplus: A Theoretical and Experimental Investigation

The chapter delves into the effects of market institutions on outcomes like prices and efficiency through a lab experiment. It compares three market institutions typical of goods markets: non-negotiable price posting, negotiated prices, and flexible pricing. The study adapts a decentralized directed-search setting where sellers post prices and buyers direct their search based on the information they receive. The experiment reveals substantial deviations from theoretical predictions, such as lower efficiency under haggling and flexible pricing, and sellers' profits being higher under posting. The chapter also explores bargaining and auction behaviors, showing that these deviate from theoretical predictions, impacting the overall market outcomes. The findings suggest that incorporating behavioral aspects into theoretical models could improve the predictive power of economic theories in such settings.