Directed Search with Endogenous Capacity

Mats Godenhielm and Klaus Kultti ()

The B.E. Journal of Theoretical Economics, 2015, vol. 15, issue 2, 211-249

Abstract: We study a large economy where capacity-constrained sellers post prices to attract buyers. Capacity is costly and each seller chooses how many units to stock, which allows us to study the relationship between search frictions and capacity. We show that no equilibrium exists with linear costs; however, sufficiently convex costs are enough for existence. There may be several equilibria, but we show that the equilibrium payoffs to the agents are unique as well as constrained efficient. Finally, we numerically analyze how the magnitude of search frictions is affected by the capacity choices of the firms.

Keywords: directed search; firm size (search for similar items in EconPapers)
JEL-codes: D40 D43 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (9)

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Working Paper: Directed search with endogenous capacity (2011)
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DOI: 10.1515/bejte-2014-0006

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