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Bertrand Competition for Inputs and Walrasian Outcomes

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Author Info
Stahl, Dale O, II
Abstract

Market making by merchants, who obtain stock from suppliers and resell it to con sumers, is modeled as a two-stage pricing game with winner-take-all c ompetition for the inputs (in contrast to fixed-capacity models). The re is a unique, subgame-perfect Nash equilibrium (SPNE) which is Walr asian for elastic demand and non-Walrasian for inelastic demand. Alte rnatively, when merchants first sell forward contracts to consumers a nd then compete for supplies, the unique SPNE is always Walrasian. Th us, the author has an equilibrium model in which Walrasian price aris es not from the benevolent actions of a fictitious auctioneer, but fr om optimal price-setting behavior of merchants. Copyright 1988 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 78 (1988)
Issue (Month): 1 (March)
Pages: 189-201
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Handle: RePEc:aea:aecrev:v:78:y:1988:i:1:p:189-201

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