Bargaining foundations for price taking in matching markets

32 Pages Posted: 4 Aug 2018 Last revised: 22 Dec 2020

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. In the context of a general non-cooperative bargaining model featuring dynamic entry, we show that everyone necessarily becomes a price taker as bargaining frictions vanish if and only if there is a minimal amount of competition always present in the market. The necessity of this condition highlights that dynamic entry need not create enough competition to guarantee price taking even if agents are arbitrarily patient. The sufficiency of this condition highlights that everyone can be a price taker even in markets that appear extremely thin at every point in time.

Keywords: Noncooperative bargaining; price taking; investment incentives; holdup problem.

JEL Classification: C72; C78; D40; D41

Suggested Citation

Elliott, Matthew and Talamàs, Eduard, Bargaining foundations for price taking in matching markets. Available at SSRN: https://ssrn.com/abstract=3218411 or http://dx.doi.org/10.2139/ssrn.3218411

Matthew Elliott (Contact Author)

Cambridge University ( email )

Faculty of Economics
Austin Robinson Building Sidgwick Avenue
Cambridge, CB39DD
United Kingdom

Eduard Talamàs

IESE Business School ( email )

Arnús i Garí, 3-7
Barcelona, Philadelphia 08034
Spain

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