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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Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number
068.
Find related papers by JEL classification: C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory D49 - Microeconomics - - Market Structure and Pricing - - - 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