Search theory, competitive equilibrium, and the Nash bargaining solution

• Published in: Journal of economic theory Vol. 148; no. 4; pp. 1659 - 1688
• Main Authors: Cho, In-Koo, Matsui, Akihiko
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.07.2013; Elsevier; Elsevier Science Publishing Company, Inc
• Subjects: Bargaining; Breaking down; Competition; Competitiveness; Economic equilibrium; Economic models; Economic theory; Economics; Equilibrium; Friction; Game theory; Management science; Matching; Mathematical models; Nash bargaining solution; Nash equilibrium; Nash-Gleichgewicht; Partnerships; Probability; Search; Searching; Strategy; Studies; Suchtheorie; Theorie; Undominated strategy equilibrium; Verhandlungstheorie; Matching; Undominated strategy equilibrium; C78; Search; C70; Nash bargaining solution; D83
• ISSN: 0022-0531; 1095-7235
• DOI: 10.1016/j.jet.2013.04.003

We investigate a canonical search-theoretic model without entry. Two agents are randomly matched with a long side being rationed. The matched agents face a pair of randomly drawn non-transferable payoffs, and then choose whether or not to form a partnership subject to a small probability of exogenous break down. As this probability and friction vanish, the Nash bargaining solution emerges as the unique undominated strategy equilibrium outcome if the mass of each party is the same. If the size of one party is larger than the other, the short side extracts the entire surplus, a sharp contrast to Rubinstein and Wolinsky (1985) [16].