Search, Dealers, and the Terms of Trade
14 Pages Posted: 21 Dec 2014
Date Written: March 1, 2001
I study a search-theoretic model with pairwise meetings where dealers arise endogenously. The extent of intermediation depends on its cost, trade frictions, and the dealers’ ability to negotiate favorable terms of trade. Under Nash bargaining, there is a unique equilibrium where dealers buy and hold the low-storage-cost good and, depending on their relative bargaining power, resell it at a premium or a discount. The distribution of the terms of trade is non-degenerate unless storage cost and frictions vanish. Due to an externality created by intermediation, the efficient allocation can be achieved only if dealers can charge a positive markup.
Keywords: Search, Intermediation, Prices, Bargaining
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