Econometrica: Jan 2007, Volume 75, Issue 1

Dynamic Matching, Two‐Sided Incomplete Information, and Participation Costs: Existence and Convergence to Perfect Competition

https://doi.org/10.1111/j.1468-0262.2007.00735.x
p. 155-200

Mark Satterthwaite, Artyom Shneyerov

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.

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