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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.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1000.

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Date of creation: 2012
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Handle: RePEc:wrk:warwec:1000

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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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  1. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, Elsevier, vol. 39(9), pages 1747-1764, December.
  2. Ruqu Wang, 1991. "Auctions Versus Posted-Price Selling," Working Papers, Queen's University, Department of Economics 812, Queen's University, Department of Economics.
  3. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  4. Adrian M. Masters, . "Wage Posting in Two-sided Search and the Minimum Wage," Economics Discussion Papers, University of Essex, Department of Economics 457, University of Essex, Department of Economics.
  5. Ellingsen, T. & Rosen, A., 1997. "Fixed or Flexible? Wage Setting in Search Equilibrium," Papers, Uppsala - Working Paper Series 1997-17, Uppsala - Working Paper Series.
  6. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, American Finance Association, vol. 16(1), pages 8-37, 03.
  7. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521576475.
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Cited by:
  1. Michelacci, Claudio & Suarez, Javier, 2002. "Incomplete Wage Posting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3658, C.E.P.R. Discussion Papers.
  2. Gabriele Camera & Alain Delacroix, 2004. "Trade Mechanism Selection in Markets with Frictions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 851-868, October.
  3. Camera, G. & Delacroix, A., 2001. "Bargaining or Price Posting?," Purdue University Economics Working Papers 1147, Purdue University, Department of Economics.

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