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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.

Suggested Citation

  • Masters, Adrian & Muthoo, Abhinay, 2012. "Ex-Ante Price Commitment With Renegotiation In A Dynamic Market," The Warwick Economics Research Paper Series (TWERPS) 1000, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:1000
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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2012/twerp_1000.pdf
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    References listed on IDEAS

    as
    1. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, vol. 39(9), pages 1747-1764, December.
    2. Tore Ellingsen & Asa Rosen, 2003. "Fixed or Flexible? Wage-setting in Search Equilibrium," Economica, London School of Economics and Political Science, vol. 70(278), pages 233-250, May.
    3. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, May.
    4. Wang, Ruqu, 1993. "Auctions versus Posted-Price Selling," American Economic Review, American Economic Association, vol. 83(4), pages 838-851, September.
    5. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    6. 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, vol. 39(2), pages 257-273, May.
    7. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    8. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-288, March.
    9. Masters, Adrian M, 1999. "Wage Posting in Two-Sided Search and the Minimum Wage," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 809-826, November.
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    More about this item

    Keywords

    Match-specific heterogeneity ; Ex-ante Price Posting ; Ex-Post Mutually Beneficial Renegotiation ; Markov Subgame Perfect Equilibrium.;

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