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Fairness, Price Stickiness, and History Dependence in Decentralized Trade

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  • Christian Korth
  • Stefan Napel

Abstract

The paper investigates price formation in a decentralized market with random matching. Agents are assumed to have subdued social preferences: buyers, for example, prefer a lower price to a higher one but experience reduced utility increases below a reference price which serves as a common fairness benchmark. The strategic equilibrium reflects market fundamentals, but it is markedly less sensitive to the buyer-seller ratio near the fair price benchmark. Prices may be sticky around very di erent reference levels in markets with otherwise identical fundamentals. The implied history dependence turns out to be mitigated rather than exacerbated by friction.

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File URL: http://www.bgpe.de/texte/DP/064_korth.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 064.

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Length: 24 pages
Date of creation: Jul 2008
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Handle: RePEc:bav:wpaper:064_korth

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Web page: http://www.bgpe.de/
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Keywords: random matching; price stickiness; social preferences; history dependence; reference dependence;

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