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Market Power And Efficiency In A Search Model

Author

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  • Manolis Galenianos
  • Philipp Kircher
  • Gábor Virág

Abstract

We build a theoretical model to study the welfare effects and resulting policy implications of firms’ market power in a frictional labor market. Our environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. We find that the decentralized equilibrium is inefficient and that the firms’ market power results in the misallocation of workers from the highto the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies. Moderate unemployment benefits can increase welfare because they limit firms’ market power by improving the workers’ outside option.
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Suggested Citation

  • Manolis Galenianos & Philipp Kircher & Gábor Virág, 2011. "Market Power And Efficiency In A Search Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 85-103, February.
    • Handle: RePEc:ier:iecrev:v:52:y:2011:i:1:p:85-103
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    Cited by:

    1. Gregor Jarosch & Jan Sebastian Nimczik & Isaac Sorkin, 2024. "Granular Search, Market Structure, and Wages," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(6), pages 3569-3607.
    2. Jacquet, Nicolas L. & Tan, Serene, 2012. "Wage-vacancy contracts and coordination frictions," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1064-1104.
    3. Gregor Jarosch & Isaac Sorkin & Jan Sebastian Nimczik, 2019. "Granular Search, Concentration and Wages," 2019 Meeting Papers 1018, Society for Economic Dynamics.
    4. Kim, Jaehong & Li, Mengling & Xu, Menghan, 2025. "Priority search with outside options," Theoretical Economics, Econometric Society, vol. 20(3), July.
    5. Andrey Launov & Klaus Wälde, 2013. "Estimating Incentive And Welfare Effects Of Nonstationary Unemployment Benefits," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(4), pages 1159-1198, November.
    6. Chen, Yi & Jungbauer, Thomas & Wang, Zhe, 2023. "The strategic decentralization of recruiting," Journal of Economic Theory, Elsevier, vol. 209(C).
    7. Gabriele Camera & Jaehong Kim, 2016. "Dynamic directed search," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 131-154, June.
    8. Stanislav Rabinovich & Ronald Wolthoff, 2020. "Misallocation Effects of Labor Market Frictions," Working Papers tecipa-662, University of Toronto, Department of Economics.
    9. Panagiotis Nanos, 2023. "Minimum wage spillover effects and social welfare in a model of stochastic job matching," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(4), pages 753-802, August.
    10. Eeckhout, Jan & Kircher, Philipp, 2010. "Sorting versus screening: Search frictions and competing mechanisms," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1354-1385, July.
    11. Sheng Bi & Yuanyuan Li, 2016. "Holdup and hiring discrimination with search friction," Documents de travail du Centre d'Economie de la Sorbonne 16002, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    12. Forand, Jean Guillaume, 2013. "Competing through information provision," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 438-451.
    13. Jayasena, Arun & Libir, Mumi & Rahmat, Omar, 2025. "Strategic Bargaining in Search Models," SocArXiv u9b4c_v1, Center for Open Science.
    14. Jayasena, Arun & Libir, Mumi & Rahmat, Omar, 2021. "Strategic Bargaining in Search Models: An Overview," MPRA Paper 124947, University Library of Munich, Germany.
    15. Girum Abebe & A Stefano Caria & Marcel Fafchamps & Paolo Falco & Simon Franklin & Simon Quinn, 2021. "Anonymity or Distance? Job Search and Labour Market Exclusion in a Growing African City [Endogenous Stratification in Randomized Experiments]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(3), pages 1279-1310.
    16. Kircher, Philipp & Wright, Randall & Julien, Benoit & Guerrieri, Veronica, 2017. "Directed Search: A Guided Tour," CEPR Discussion Papers 12315, C.E.P.R. Discussion Papers.
    17. Abebe, Girum & Caria, Stefano & Fafchamps, Marcel & Falco, Paolo & Franklin, Simon & Quinn, Simon, 2017. "Anonymity of distance? Job search and labour market exclusion in a growing African city," LSE Research Online Documents on Economics 86573, London School of Economics and Political Science, LSE Library.
    18. Manolis Galenianos & Philipp Kircher, 2012. "On The Game‐Theoretic Foundations Of Competitive Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 1-21, February.
    19. Wolthoff, Ronald P., 2011. "It's About Time: Implications of the Period Length in an Equilibrium Job Search Model," IZA Discussion Papers 6002, IZA Network @ LISER.
    20. Rabinovich, Stanislav & Wolthoff, Ronald, 2022. "Misallocation inefficiency in partially directed search," Journal of Economic Theory, Elsevier, vol. 206(C).
    21. Deng, Xiaotie & Gafni, Yotam & Lavi, Ron & Lin, Tao & Ling, Hongyi, 2025. "From monopoly to competition: When do optimal contests prevail?," Games and Economic Behavior, Elsevier, vol. 153(C), pages 268-293.
    22. Kircher, Philipp & Kim, Kyungmin, 2012. "Efficient Cheap Talk in Directed Search: On the Non-essentiality of Commitment in Market Games," CEPR Discussion Papers 8759, C.E.P.R. Discussion Papers.
    23. BI, Sheng & LI, Yuanyuan, 2015. "Holdup and hiring discrimination with search friction," MPRA Paper 65100, University Library of Munich, Germany.
    24. Wu, Liangjie, 2024. "Partially directed search in the labor market," Journal of Economic Theory, Elsevier, vol. 220(C).

    More about this item

    JEL classification:

    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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