Learning and Price Discovery in a Search Model

We develop a dynamic matching and bargaining game with aggregate uncertainty about the relative scarcity of a commodity. We use our model to study price discovery in a decentralized exchange economy: Traders gradually learn about the state of the market through a sequence of multilateral bargaining rounds. We characterize the resulting equilibrium trading patterns. We show that equilibrium outcomes are approximately competitive when frictions are small. Therefore, prices aggregate information about the scarcity of the traded commodity; that is, prices correctly reflect the commodity's economic value