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Learning and Price Discovery in a Search Model
Gabor Virag*, Stephan Lauermann
Last modified: 2013-04-15
Abstract
We develop a dynamic matching and bargaining game with aggregate uncer-
tainty 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 commoditys economic value.
tainty 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 commoditys economic value.