Heterogeneity as a Coordination Device
UPF Economics & Business Working Paper No. 510
38 Pages Posted: 3 Nov 2000
Date Written: February 2000
Abstract
A model of directed search with a finite number of buyers and sellers is considered, where sellers compete in direct mechanisms. Buyer heterogeneity and Nash equilibrium results in perfect sorting. The restriction to complementary inputs, that the match value function Q is supermodular, in addition coordinates the seller' strategies. In that case, equilibrium implements positive assortative matching, which is efficient and consistent with the stable (cooperative equilibrium) outcome. This provides a non-cooperative and decentralized solution for the Assignment Game. Conversely, if buyers are identical, no such coordination is possible, and there is a continuum of equilibria, one of which exhibits price posting, another yields competition in auctions.
Keywords: Matching, assignment game, directed search, supermodularity, truthful equilibrium
JEL Classification: C7, D4
Suggested Citation: Suggested Citation
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