Posted Offer versus Bargaining: An Example of how Institutions can Facilitate Learning

This paper introduces a notion of learning as found in formal learning theory. This concept of learning enables us to investigate the idea that certain market institutions have the desirable property that they reduce the difficulty of adaptive learning, hence facilitating inductive reasoning. To exemplify this idea, we compare the popular market institutions of the posted offer selling mechanism and price bargaining. A seller of a durable consumer good who enjoys relative monopoly power characterizes both market institutions. The seller offers the good for sale for an infinite number of consecutive trading periods. At the beginning of every trading period she has to determine the price and the quality for the good offered where the profits realized in the past guide her choice, i.e., profit serves as the measure of success. Loosely put, the question then is which market institution better facilitates inductive reasoning.