Theoretical Economics, Volume 8, Number 2 (May 2013)

Theoretical Economics 8 (2013), 535–590


Pricing and investments in matching markets

George J. Mailath, Andrew Postlewaite, Larry Samuelson

Abstract


Different markets are cleared by different types of prices—seller-specific prices that are uniform across buyers in some markets, and personalized prices tailored to the buyer in others. We examine a setting in which buyers and sellers make investments before matching in a competitive market. We introduce the notion of premuneration values—the values to the transacting agents prior to any transfers— created by a buyer-seller match. Personalized price equilibrium outcomes are independent of premuneration values and exhibit inefficiencies only in the event of “coordination failures,” while uniform-price equilibria depend on premuneration values and in general feature inefficient investments even without coordination failures. There is thus a trade-off between the costs of personalizing prices and the inefficient investments under uniform prices. We characterize the premuneration values under which uniform-price equilibria similarly exhibit inefficiencies only in the event of coordination failures.

Keywords: Directed search, matching, premuneration value, prematch investments, search

JEL classification: C78, D40, D41, D50, D83

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