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Directed search with endogenous capacity

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  • Klaus Kultti

    (University of Helsinki and HECER)

  • Mats Godenhielm

    (University of Helsinki)

Abstract

We consider a large market with frictions. We are in a directed search type setting, sellers are capacity constrained, post prices, and buyers contact sellers taking into account price and probability of service. We aim to endogenize the sellers' capacities. To this end we formulate a three stage game, where the sellers choose their capacity in the first stage, in the second stage sellers choose their price given the capacities, and in the third stage buyers choose which firm to visit. We analyse price formation when sellers' have different capacities. A non-existence result is introduced for linear costs. We also characterize equilibrium with free entry and increasing and convex costs. In addition we derive the matching function and the social welfare function and show that the capacity chosen under free entry is efficient.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1025.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1025

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  1. Geromichalos, Athanasios, 2012. "Directed search and optimal production," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2303-2331.
  2. William B. Hawkins, 2013. "Competitive Search, Efficiency, And Multiworker Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(1), pages 219-251, 02.
  3. Kultti, K.K., 1997. "Equivalence of Auctions and Posted Prices," Discussion Paper 1997-57, Tilburg University, Center for Economic Research.
  4. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  5. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
  6. Kultti Klaus, 2011. "Sellers Like Clusters," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-28, December.
  7. Lester, Benjamin, 2010. "Directed search with multi-vacancy firms," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2108-2132, November.
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