Bargaining foundations for price taking in matching markets

Matthew Elliott and Eduard Talamas

No 19568, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Date: 2024-10
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