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Pricing with frictions

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Author Info

  • Kenneth Burdett
  • Shouyong Shi
  • Randall Wright

Abstract

The authors analyze markets where each of n buyers wants to buy one unit and each of m sellers wants to sell one or more units of an indivisible good. Sellers first set prices, then buyers choose which sellers to visit. There are equilibria where each buyer visits sellers at random and faces a positive probability of rationing when too many other buyers show up at the same location. The authors solve for equilibrium prices and other variables as functions of n and m, compare the outcome to the predictions of other models, and derive some limiting results as the economy gets large. The authors also discuss the impact of changes in capacity and show that the effects of an increase in supply can be very different depending on whether it occurs along the intensive or the extensive margin (a change in the number of units of output per seller or in the number of sellers). Among other things, this last result suggests that the standard matching function in the equilibrium search literature is misspecified. On the basis of this interpretation, the authors propose that the observed outward shift in the Beveridge curve may be explained by a shift in the firm-size distribution.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 98-9.

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Date of creation: 1998
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Handle: RePEc:fip:fedpwp:98-9

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Related research

Keywords: Prices ; Wages;

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Cited by:
  1. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  2. Melvyn G. Coles & Jan Eeckhout, . "Efficient Job Allocation," Penn CARESS Working Papers f254df043aa954b9f2d76c248, Penn Economics Department.
  3. Acemoglu, Daron & Shimer, Robert, 2000. "Productivity gains from unemployment insurance," European Economic Review, Elsevier, vol. 44(7), pages 1195-1224, June.
  4. Calvó-Armengol, Antoni & Zenou, Yves, 2001. "Job Matching, Social Network and Word-of-Mouth Communication," CEPR Discussion Papers 2797, C.E.P.R. Discussion Papers.
  5. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  6. Miquel Faig & Belen Jerez, 2003. "A Theory of Commerce: Competitive Search Under Private Information," Working Papers faig-02-01, University of Toronto, Department of Economics.
  7. Shouyong Shi, 2005. "Frictional Assignment, Part II: Infinite Horizon and Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 106-137, January.
  8. Peters, Michael, 2000. "Limits of Exact Equilibria for Capacity Constrained Sellers with Costly Search," Journal of Economic Theory, Elsevier, vol. 95(2), pages 139-168, December.
  9. Alain Delacroix & Shouyong Shi, 2006. "Directed Search On The Job And The Wage Ladder," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 651-699, 05.
  10. Melvyn G. Coles & Jan Eeckhout, 2000. "Heterogeneity as a coordination device," Economics Working Papers 510, Department of Economics and Business, Universitat Pompeu Fabra.
  11. Shouyong Shi, 2000. "The Research Agenda: Search Theory beyond the Matching Function," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 1(2), April.
  12. Ángel Hernando Veciana, 2001. "Competition Among Auctioneers," Working Papers. Serie AD 2001-18, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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