Dynamic matching, two-sided incomplete information, and participation costs: Existence and convergence to perfect competition

Mark Satterthwaite*, Artyom Shneyerov

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

40 Scopus citations

Abstract

Consider a decentralized, dynamic market with an infinite horizon and participation costs in which both buyers and sellers have private information concerning their values for the indivisible traded good. Time is discrete, each period has length δ, and, each unit of time, continuums of new buyers and sellers consider entry. Traders whose expected utility is negative choose not to enter. Within a period each buyer is matched anonymously with a seller and each seller is matched with zero, one, or more buyers. Every seller runs a first price auction with a reservation price and, if trade occurs, both the seller and the winning buyer exit the market with their realized utility. Traders who fail to trade continue in the market to be rematched. We characterize the steady-state equilibria that are perfect Bayesian. We show that, as δ converges to zero, equilibrium prices at which trades occur converge to the Walrasian price and the realized allocations converge to the competitive allocation. We also show the existence of equilibria for δ sufficiently small, provided the discount rate is small relative to the participation costs.

Original languageEnglish (US)
Pages (from-to)155-200
Number of pages46
JournalEconometrica
Volume75
Issue number1
DOIs
StatePublished - Jan 2007

Keywords

  • Double auctions
  • Foundations of Walrasian equilibrium
  • Matching and bargaining
  • Price formation

ASJC Scopus subject areas

  • Economics and Econometrics

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