Bargaining foundations for price taking in matching markets
36 Pages Posted: 4 Aug 2018 Last revised: 16 May 2024
Abstract
Agents make non-contractible investments before bargaining over who matches with whom and their terms of trade. When an agent is a price taker—in the sense that her investments do not change her potential partners’ payoffs—she has incentives to make socially-optimal investments. Across a variety of non-cooperative bargaining models featuring dynamic entry, we show that everyone necessarily becomes a price taker as the discount factor goes to 1 if there is a minimal amount of competition always present in the market. If this condition is not satisfied, dynamic entry need not create enough competition to guarantee price taking even if agents are arbitrarily patient.
Keywords: Noncooperative bargaining; price taking; investment incentives; holdup problem.
JEL Classification: C72; C78; D40; D41
Suggested Citation: Suggested Citation