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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.

Suggested Citation

  • Christian Korth & Stefan Napel, 2009. "Fairness, Price Stickiness, and History Dependence in Decentralized Trade," Working Papers 068, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:068_korth
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    More about this item

    Keywords

    random matching; price stickiness; social preferences; history dependence; reference dependence;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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