Competitive Pricing and Efficiency in Search Equilibrium

20 Pages Posted: 16 May 2002

See all articles by Dale T. Mortensen

Dale T. Mortensen

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

Randall Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Abstract

We consolidate and generalize some results on price determination and efficiency in search equilibrium. Extending models by Rubinstein and Wolinsky and by Gale, heterogeneous buyers and sellers meet according to a general matching technology and prices are determined by a general bargaining condition. When the discount rate 'r' and search costs converge to 0, we show that prices in all exchanges are the same and equal the competitive, market clearing, price. Given positive search costs, efficiency obtains iff bargaining satisfies Hosios' condition and r = 0. When prices are set by third-party market makers, however, we show that search equilibrium is necessarily efficient.

Suggested Citation

Mortensen, Dale T. and Wright, Randall D., Competitive Pricing and Efficiency in Search Equilibrium. Available at SSRN: https://ssrn.com/abstract=312518

Dale T. Mortensen (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8230 (Phone)
847-491-7001 (Fax)

IZA Institute of Labor Economics

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

Randall D. Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3860 (Phone)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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