Abstract:

We model a trading process which, although stylized, captures the essential features of decentralized markets. In these markets trade is bilateral, finding a trading partner is costly, prices are determined by bargaining, and preferences are private information. In contrast to the existing literature, no restriction is imposed on traders' possible bargaining positions. We characterize prices and trading patterns, as well as the dynamics of trading patterns and market composition. We identify conditions under which market equilibria exhibit delay, and show that delay persist even as frictions vanish. Nonetheless, transaction prices converge to the Walrasian equilibrium price as the market becomes frictionless.