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Ex Ante Price Commitment with Renegotiation in a Dynamic Market

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Author Info
A. Masters ()
A. Muthoo ()

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Abstract

This paper studies the endogenous determination of the price formation procedure in markets characterized by match-specific heterogeneity; such heterogeneity captures, for example, markets in which sellers own differentiated commodities and buyers have heterogeneous preferences. Specifically, we study a dynamic, stochastic model of a market in which, in each time period, agents on one side (e.g., sellers) strategically choose whether or not to "post", or commit themselves to, incomplete price contracts before they encounter agents of the opposite type. After a pair of agents of the opposite types have encountered each other, their match-specific values from trading with each other are realised. If no price contract was posted, then the terms of trade (and whether or not it occurs) are determined by bilateral negotiations. Otherwise, depending upon the agents’ match-specific trading values and equilibrium continuation payoffs, trade occurs (if it does) either on the terms specified in the posted contract or at a renegotiated price (when renegotiation of the posted, incomplete price contract is mutually beneficial). We study the Markov subgame perfect equilibria of this market game, and address a variety of issues such as the impact of market frictions on the equilibrium proportion of trades that occur at a price specified in the ex-ante posted contract rather than at a price determined by ex-post bargaining.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 555.

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Date of creation: 16 Jun 2003
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Handle: RePEc:esx:essedp:555

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  1. Jeremy Bulow & Paul Klemperer, 1994. "Auctions vs. Negotiations," NBER Working Papers 4608, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, vol. 39(9), pages 1747-1764, December. [Downloadable!] (restricted)
  3. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-88, March. [Downloadable!] (restricted)
  4. Masters, Adrian M, 1999. "Wage Posting in Two-Sided Search and the Minimum Wage," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 809-26, November.
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  5. Dale T. Mortensen, 1982. "The Matching Process as a Noncooperative Bargaining Game," NBER Chapters, in: The Economics of Information and Uncertainty, pages 233-258 National Bureau of Economic Research, Inc. [Downloadable!]
  6. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September. [Downloadable!] (restricted)
  7. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September. [Downloadable!] (restricted)
  8. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
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  10. Wang, Ruqu, 1993. "Auctions versus Posted-Price Selling," American Economic Review, American Economic Association, vol. 83(4), pages 838-51, September. [Downloadable!] (restricted)
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  11. Tore Ellingsen & Asa Rosen, 2003. "Fixed or Flexible? Wage-setting in Search Equilibrium," Economica, London School of Economics and Political Science, vol. 70(278), pages 233-250, 05. [Downloadable!] (restricted)
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  12. Dale T. Mortensen, 1979. "The Matching Process as a Non-Cooperative/Bargaining Game," Discussion Papers 384, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  13. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics. [Downloadable!]
  14. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
  15. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  16. Diamond, Peter A, 1981. "Mobility Costs, Frictional Unemployment, and Efficiency," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 798-812, August. [Downloadable!] (restricted)
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  17. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
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