Search and Herding with Capacity Constraints

Joint with: Robert Tayon, Jr.

We study value discovery in discrete-time dynamic markets with imperfect information and capacity constraints. Homogeneous, short-lived buyers with inelastic demand for a unit of a heterogeneous good encounter infinite-lived sellers of fixed types. The number of trades at each seller

in the prior period is public information. Buyers do not have information about the type of the good offered at any particular seller, but they can acquire private information about a single seller by sampling. This market segments into areas of known quality and unknown quality. The known

quality sellers get "too many" buyers until search ends. In segments of unknown quality, informed traders drive out uninformed traders, reducing trade. This pattern of trade resembles risk-aversion, though buyers are risk-neutral.

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