Pricing and investments in matching markets

Abstract

Different markets are cleared by different types of prices: seller-specific prices that are uniform across buyers in some markets and personalized prices tailored to the buyer in others. We examine a setting in which buyers and sellers make investments before matching in a competitive market. We introduce the notion of premuneration values-the values to the transacting agents prior to any transfers-created by a buyer-seller match. Personalized-price equilibrium outcomes are independent of premuneration values and exhibit inefficiencies only in the event of "coordination failures," while uniform-price equilibria depend on premuneration values and, in general, feature inefficient investments even without coordination failures. There is thus a trade-off between the costs of personalizing prices and the inefficient investments under uniform prices. We characterize the premuneration values under which uniform-price equilibria similarly exhibit inefficiencies only in the event of coordination failures. Show more