Sorting and Decentralized Price Competition

48 Pages Posted: 2 Jun 2008

See all articles by Jan Eeckhout

Jan Eeckhout

University College London - Department of Economics

Philipp Kircher

University of Pennsylvania - Department of Economics; IZA Institute of Labor Economics

Date Written: May 2008

Abstract

We investigate under which conditions price competition in a market with matching frictions leads to sorting of buyers and sellers. Positive assortative matching obtains only if there is a high enough degree of complementarity between buyer and seller types. The relevant condition is root-supermodularity; i.e., the square root of the match value function is supermodular. It is a necessary and sufficient condition for positive assortative matching under any distribution of buyer and seller types, and does not depend on the details of the underlying matching function that describes the search process. The condition is weaker than log-supermodularity, a condition required for positive assortative matching in markets with random search. This highlights the role competition plays in matching heterogeneous agents. Negative assortative matching obtains whenever the match value function is weakly submodular.

Keywords: Competitive Search Equilibrium. Directed Search. Two-Sided Matching. Decentralized Price Competition. Root-Supermodularity.

JEL Classification: J64, C78, D83

Suggested Citation

Eeckhout, Jan and Kircher, Philipp, Sorting and Decentralized Price Competition (May 2008). PIER Working Paper No. 08-020, Available at SSRN: https://ssrn.com/abstract=1139831 or http://dx.doi.org/10.2139/ssrn.1139831

Jan Eeckhout (Contact Author)

University College London - Department of Economics ( email )

30 Gordon Street
London WC1E 6BT, WC1H 0AX
United Kingdom

Philipp Kircher

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6777 (Phone)
215-573-2057 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
109
Abstract Views
1,062
rank
278,351
PlumX Metrics