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Directed search with endogenous capacity

Author

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  • Klaus Kultti

    (University of Helsinki and HECER)

  • Mats Godenhielm

    (University of Helsinki)

Abstract

We consider a large market with frictions. We are in a directed search type setting, sellers are capacity constrained, post prices, and buyers contact sellers taking into account price and probability of service. We aim to endogenize the sellers' capacities. To this end we formulate a three stage game, where the sellers choose their capacity in the first stage, in the second stage sellers choose their price given the capacities, and in the third stage buyers choose which firm to visit. We analyse price formation when sellers' have different capacities. A non-existence result is introduced for linear costs. We also characterize equilibrium with free entry and increasing and convex costs. In addition we derive the matching function and the social welfare function and show that the capacity chosen under free entry is efficient.

Suggested Citation

  • Klaus Kultti & Mats Godenhielm, 2011. "Directed search with endogenous capacity," 2011 Meeting Papers 1025, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1025
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    References listed on IDEAS

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    1. Kultti, Klaus, 1999. "Equivalence of Auctions and Posted Prices," Games and Economic Behavior, Elsevier, vol. 27(1), pages 106-113, April.
    2. William B. Hawkins, 2013. "Competitive Search, Efficiency, And Multiworker Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(1), pages 219-251, February.
    3. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
    4. Selcuk, Cemil, 2012. "Trading mechanism selection with directed search when buyers are risk averse," Economics Letters, Elsevier, pages 207-210.
    5. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-1454, September.
    6. Watanabe, Makoto, 2010. "A model of merchants," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1865-1889, September.
    7. Geromichalos, Athanasios, 2012. "Directed search and optimal production," Journal of Economic Theory, Elsevier, pages 2303-2331.
    8. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
    9. Klaus Kultti, 2003. "Comparison of Auctions and Posted Prices in a Finite Random Matching Model," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 159(3), pages 457-457, September.
    10. Lester, Benjamin, 2010. "Directed search with multi-vacancy firms," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2108-2132, November.
    11. Kultti Klaus, 2011. "Sellers Like Clusters," The B.E. Journal of Theoretical Economics, De Gruyter, pages 1-28.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, pages 3030-3060.
    2. Han Han & Benoit Julien & Asgerdur Petursdottir & Liang Wang, 2016. "Credit, Money and Asset Equilibria with Indivisible Goods," Working Papers 201601, University of Hawaii at Manoa, Department of Economics.
    3. Athanasios Geromichalos, 2015. "Unemployment Insurance and Optimal Taxation in a Search Model of the Labor Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 365-380, April.
    4. Pere Gomis-Porqueras & Benoit Julien & Liang Wang, 2016. "Competitive Search with Ex-post Opportunism," Working Papers 201604, University of Hawaii at Manoa, Department of Economics.
    5. repec:bpj:bejtec:v:18:y:2018:i:1:p:17:n:6 is not listed on IDEAS
    6. Theresa M. GREANEY & Baybars KARACAOVALI, 2017. "Trade, Growth and Economic Inequality in the Asia-Pacific Region: Lessons for Policymakers," Journal of Economics and Political Economy, KSP Journals, pages 135-143.
    7. Klaus Kultti & Eeva Mauring, 2014. "Low price signals high capacity," Journal of Economics, Springer, pages 165-181.

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