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Sorting and Decentralized Price Competition

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  • Jan Eeckhout
  • Philipp Kircher

Abstract

We investigate the role of search frictions in markets with price competition and how it leads to sorting of heterogeneous agents. There are two aspects of value creation: the match value when two agents actually trade and the probability of trading governed by the search technology. We show that positive assortative matching obtains when complementarities in the former outweigh complementarities in the latter. This happens if and only if the match-value function is root-supermodular, that is, its nth root is supermodular, where n reflects the elasticity of substitution of the search technology. This condition is weaker than the condition required for positive assortative matching in markets with random search. Copyright 2010 The Econometric Society.

Suggested Citation

  • Jan Eeckhout & Philipp Kircher, 2010. "Sorting and Decentralized Price Competition," Econometrica, Econometric Society, vol. 78(2), pages 539-574, March.
    • Handle: RePEc:ecm:emetrp:v:78:y:2010:i:2:p:539-574
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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