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A Note on the Strategic Foundation of Competitive Equilibrium in Buyer Markets

Roman Inderst

No 99-16, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: We consider price formation in a simple market where sellers have fixed capacity and where any seller is dispensable (`buyer market'). In the analyzed game sellers simultaneously quote prices and buyers choose which seller to visit. If demand exceeds supply at a given seller, buyers are randomly rationed. Visiting another seller is costly. The coordination problem among buyers creates space for non-competitive prices. We analyze two ways how the set of prices at which goods are traded converges to the unique competitive price. First, coordination is facilitated if the number of buyers and therefore the accuracy of predicting congestions increases. Secondly, coordination failure becomes less serious if the costs of visiting another seller decrease.

Pages: 15 pages
Date: 1999-03-11
Note: Financial Support from Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim is gratefully acknowledged. I benefitted from discussions with Holger Müller and from work with Achim Wambach. Mailing address: Roman Inderst, Sonderforschungsbereich 504, Universität Mannheim, 68131 Mannheim. E-mail: inderst@sfb504.uni-mannheim.de.
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