Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium

This paper extends the bargaining and matching literature such as Rubinstein (1985) and Gale (1986 and 1987) by considering a new matching process. We assume that a central information agency exists, such as job centres and newspapers in the labour market, or real estate agents in the housing market, which puts potential traders into direct contact with each other. With agent heterogeneity, equilibrium trade is characterized by existing traders on the other side (since existing traders have already sampled and rejected each other). Two procedures of trade coexist, namely strategic bilateral bargaining 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.