Directed Search with Endogenous Capacity
We study a large economy where capacity-constrained sellers post prices to attract buyers. Capacity is costly and each seller chooses how many units to stock, which allows us to study the relationship between search frictions and capacity. We show that no equilibrium exists with linear costs; however, sufficiently convex costs are enough for existence. There may be several equilibria, but we show that the equilibrium payoffs to the agents are unique as well as constrained efficient. Finally, we numerically analyze how the magnitude of search frictions is affected by the capacity choices of the firms.
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Volume (Year): 15 (2015)
Issue (Month): 2 (July)
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