Optimal Repeated Purchases When Sellers Are Learning about Costs
Abstract A buyer repeatedly purchases some good. Suppliers privately learn their cost only upon producing at least once. Efficiency would imply sampling sellers until one is found with cost lower than a (increasing with time) reservation value. Then the good would be permanently purchased from the seller with lowest cost. A sequence of second-price auctions with participation premia and entry fees is shown to be both efficient and optimal for the buyer. An alternative calls for price offers by informed sellers, with compensations that increase in the offer. In both cases, the buyer subsidizes competition through participation premia or compensations. Journal of Economic Literature Classification Numbers: D44, D83, L14.