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Ex-Ante Price Commitment With Renegotiation In A Dynamic Market

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  • MASTERS, ADRIAN
  • MUTHOO, ABHINAY

    (Department of Economics, University of Warwick)

Abstract

This paper studies a dynamic model of a market such as a labour market in which firms post wages and search for workers but trade may occur at a negotiated wage procedure in markets characterized by match-specific heterogeneity. We study a model of a market in which, in each time period, agents on one side (e.g., sellers) choose whether or not to post a price before they encounter agents of the opposite type. After a pair of agents have encountered each other, their match-specific values from trading with each other are realized. If a price was not posted, then the terms of trade (and whether or not it occurs) are determined by bargaining. Otherwise, depending upon the agents’ match-specific trading values, trade occurs (if it does) either on the posted price or at a renegotiated price. We analyze the symmetric 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 posted price rather than at a negotiated price.

Suggested Citation

  • Masters, Adrian & Muthoo, Abhinay, 2012. "Ex-Ante Price Commitment With Renegotiation In A Dynamic Market," The Warwick Economics Research Paper Series (TWERPS) 1000, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1000
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    References listed on IDEAS

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    Keywords

    Match-specific heterogeneity ; Ex-ante Price Posting ; Ex-Post Mutually Beneficial Renegotiation ; Markov Subgame Perfect Equilibrium.;
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