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Price Setting in a Decentralized Market and the Competitive Outcome

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  • Stephan Lauermann

    ()
    (University of Bonn)

Abstract

This paper studies a decentralized, dynamic matching and bargaining market: buyers and sellers are matched into pairs. Traders exit the market at a constant rate, inducing search costs (frictions). All price offers are made by sellers. Despite the fact that sellers have all the bargaining power we show that they set competitive prices in the limit when frictions become small. Previous literature has restricted the sellers' bargaining power. We dispense with this restriction and show that the convergence result does not depend on the distribution of bargaining power. Our model allows us to isolate basic market clearing forces that ensure the competitive outcome in the frictionless limit. For the particular case of homogeneous sellers we characterize the equilibrium price by the familiar Lerner formula. We use this formula to provide comparative static results of the decentralized trading outcome with respect to the level of the search frictions.

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Bibliographic Info

Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2008_06.

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Length: 49 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:mpg:wpaper:2008_6

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Related research

Keywords: Dynamic Matching and Bargaining Games; Decentralized Markets; Non-cooperative Foundations of Competitive Equilibrium; Search Frictions; Rationing;

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References

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  1. Stephan Lauermann, 2008. "When Less Information is Good for Efficiency: Private Information in Bilateral Trade and in Markets," 2008 Meeting Papers 419, Society for Economic Dynamics.
  2. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  3. Yilankaya, Okan, 1999. "A Note on the Seller's Optimal Mechanism in Bilateral Trade with Two-Sided Incomplete Information," Journal of Economic Theory, Elsevier, vol. 87(1), pages 267-271, July.
  4. Moreno, Diego & Wooders, John, 2002. "Prices, Delay, and the Dynamics of Trade," Journal of Economic Theory, Elsevier, vol. 104(2), pages 304-339, June.
  5. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September.
  6. Shneyerov, Art & Wong, Adam Chi Leung, 2007. "Bilateral Matching and Bargaining with Private Information," Microeconomics.ca working papers shneyerov-07-05-01-03-38-, Vancouver School of Economics, revised 01 May 2007.
  7. Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
  8. Alp E. Atakan, 2010. "Competitive Equilibria in Decentralized Matching with Incomplete Information," Koç University-TUSIAD Economic Research Forum Working Papers 1031, Koc University-TUSIAD Economic Research Forum.
  9. Mark Satterthwaite & Artyom Shneyerov, 2007. "Dynamic Matching, Two-Sided Incomplete Information, and Participation Costs: Existence and Convergence to Perfect Competition," Econometrica, Econometric Society, vol. 75(1), pages 155-200, 01.
  10. Lauermann, Stephan, 2011. "Dynamic matching and bargaining games: A general approach," MPRA Paper 31717, University Library of Munich, Germany.
  11. Gianni De Fraja & Jozsef Sakovics, 2001. "Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 842-863, August.
  12. Igal Hendel & Aviv Nevo, 2006. "Measuring the Implications of Sales and Consumer Inventory Behavior," Econometrica, Econometric Society, vol. 74(6), pages 1637-1673, November.
  13. Roberto Serrano, 2000. "Decentralized Information and the Walrasian Outcome:A Pairwise Meetings Market with Private Values," Working Papers 2000-13, Brown University, Department of Economics.
  14. M. Ali Khan, 2007. "Perfect Competition," PIDE-Working Papers 2007:15, Pakistan Institute of Development Economics.
  15. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
  16. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  17. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
  18. Samuelson, Larry, 1992. "Disagreement in Markets with Matching and Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 177-85, January.
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Cited by:
  1. Adam Wong & Artyom Shneyerov, 2007. "Bilateral Matching and Bargaining with Private Information," 2007 Meeting Papers 1032, Society for Economic Dynamics.
  2. Stephan Lauermann, 2008. "When Less Information is Good for Efficiency: Private Information in Bilateral Trade and in Markets," 2008 Meeting Papers 419, Society for Economic Dynamics.
  3. Lauermann, Stephan, 2011. "Dynamic matching and bargaining games: A general approach," MPRA Paper 31717, University Library of Munich, Germany.

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