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Pricing and Investments in Matching Markets

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Abstract

Different markets are cleared by different types of prices -- seller-specific prices that are uniform across buyers in some markets, and personalized prices tailored to the buyer in others. We examine a setting in which buyers and sellers make investments before matching in a competitive market. We introduce the notion of premuneration values -- the values to the transacting agents prior to any transfers -- created by a buyer-seller match. Personalized price equilibrium outcomes are independent of premuneration values and exhibit inefficiencies only in the event of "coordination failures," while uniform-price equilibria depend on premuneration values and in general feature inefficient investments even without coordination failures. There is thus a trade-off between the costs of personalizing prices and the inefficient investments under uniform prices. We characterize the premuneration values under which uniform-price equilibria similarly exhibit inefficiencies only in the event of coordination failures.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1810.

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Length: 68 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:cwl:cwldpp:1810

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Related research

Keywords: Directed search; Matching; Premuneration value; Prematch investments; Search;

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  1. Heidrun C. Hoppe & Benny Moldovanu & Aner Sela, 2009. "The Theory of Assortative Matching Based on Costly Signals," Review of Economic Studies, Wiley Blackwell, vol. 76(1), pages 253-281, 01.
  2. Cole, Harold L. & Mailath, George J. & Postlewaite, Andrew, 2001. "Efficient Non-Contractible Investments in Large Economies," Journal of Economic Theory, Elsevier, vol. 101(2), pages 333-373, December.
  3. Sean Nicholson, 2003. "Barriers to Entering Medical Specialties," NBER Working Papers 9649, National Bureau of Economic Research, Inc.
  4. Adrian Masters, 2008. "Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium," 2008 Meeting Papers 260, Society for Economic Dynamics.
  5. Rege, Mari, 2008. "Why do people care about social status?," Journal of Economic Behavior & Organization, Elsevier, vol. 66(2), pages 233-242, May.
  6. Michael Ostrovsky & Michael Schwarz, 2008. "Information Disclosure and Unraveling in Matching Markets," NBER Working Papers 13766, National Bureau of Economic Research, Inc.
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Cited by:
  1. George Mailath & Andrew Postlewaite & Larry Samuelson, 2012. "Premuneration Values and Investments in Matching Markets," PIER Working Paper Archive 12-008, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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