Journal Article

Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium

Melvyn G. Coles and Abhinay Muthoo

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 65, issue 2, pages 235-260
Published in print April 1998 | ISSN: 0034-6527
Published online April 1998 | e-ISSN: 1467-937X | DOI:
Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium

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This paper extends the bargaining and matching literature, such as Rubinstein and Wolinsky (1985), by considering a new matching process. We assume that a central information agency exists, such as real estate agencies in the housing market and employment agencies (or newspapers) in the labour market, which puts traders into direct contact with each other. With heterogeneity of trader preferences, equilibrium trade is characterized by existing traders on each side of the market trying to match with the flow of new traders on the other side (since existing traders have already sampled and rejected each other). Two procedures of trade co-exist, namely a strategic bilateral bargaining process and a competitive bidding process, depending on the number of potential matches a new trader obtains. We characterize the unique symmetric Markov perfect equilibrium to this stochastic trading game.

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Subjects: Economics

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