5) For the ask price to play a functional role, buyer behavior must be affected by the ask price.
Models that incorporate ask prices into the search framework typically take two approaches, both of which involve justifying a negative relationship between the ask price and the arrival rate of buyers.
Another source of equilibrium ask price dispersion arises in models with many sellers.
These models find that a higher variance of buyers' valuations leads to higher ask prices, because the profitability of the high ask price strategy grows.
The role of the ask price in such a setting might be similar to that in housing markets.
Competing Explanations for an Empirically Significant Ask Price
Finally, for similar reasons of market strength, the signaling model predicts a negative relationship between the ask price and time to sale, whereas the search model predicts a positive relationship.
The next row shows the average log-difference between the ask price and the computer's value.
To measure the effect of the ask price, we also include the log-difference between the ask price and the independent assessment of the computer's value as a right-hand-side variable: (28)
The coefficient on the ask price is close to zero and is not statistically significant for the high-strength subsample.
This constitutes a rejection of a perfect information model in which ask price should be irrelevant and is also inconsistent with the hypothesis that higher ask prices reflect the presence of unobservable product characteristics.
The most straightforward approach to estimating this relationship is to include the ask price in a standard hedonic regression.
In the base specification, we measure the independent effect of the ask price on offers by including the difference between the ask price and the computer's value (the "spread") as an explanatory variable.
Thus it would probably have both a lower ask price and lower offers--but these would reflect differences in the true value of the computer.
The magnitude of the coefficient for the low-strength subsample suggests that for each dollar that the ask price exceeds the estimate of the computer's value, the highest offer for that computer is higher by 36 cents.