Competitive Pricing and Efficiency in Search Equilibrium

Dale Mortensen and Randall Wright

International Economic Review, 2002, vol. 43, issue 1, 1-20

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. Copyright 2002 by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Resarch Association

Date: 2002
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