Keisuke Kawata
ISS, UTokyo
This lecture
• Studying an alternative model of market; search theory.
⇒ Start from the basic framework, and then applications.
Material: Assigned paper and distributed slide (downloadable from Ka ata’s HP) Evaluation: Term paper
Office hour: 14:55～16:40, Monday
Model of market
• What’s market?
Classical definition: h potheti al pla e to e ha ge goods a d ser i es.
← arriage arket ?
Alternative definition: Place of matching (one to one/ one to many/ many to many) to joint activities.
Example)
Good market: Matching between buyers and sellers, and then transaction. Labor market: Matching between employees (worker) and employers
(capital/maneger), and then joint production.
Marriage market: Mat hi g et ee ale a d fe ale , a d li i g together.
Frictionless market
Traditional market model: Frictionless market model including Warlasian,
monopolistic competition, and oligopoly(Bertrand, Cournot, and others) models.
⇒ Agents have perfect knowledge about posted contracts in a market.
⇒ Obtaining key properties (with some additional assumption).
• Agents can compare contracts ⇒ law of one price.
• Agents can find matching partner if there are unmatched (but want to match) agents ⇒ law of short-side
Frictionless market
Search model: Incorporating limited knowledge
⇒ Limited ability to compare contracts and find unmatched agents. Example) Two period sequential search model with perfect memory.
• A buyer has a unit demand for (homogeneous) goods
• There are two sellers, and their price � is exogenously distributed with � � .
• To obtain the price information, the buyer needs to visit sellers with costs c.
• A buyer who purchases the goods from a seller i is
� = � − �� − ��
where n is the number of searched goods, �� is the price of seller i.
Optimal search strategy
Implications for labor markets
Wage dispersion: Standard mincer equation (wage is explained by education level and labor market experience) cannot explain almost part of the wage variation.
“tru tural u e plo e t: E e if the u er of a a ies la or de a d exceeds the number of unemployment (labor supply), unemployment is ever presented.
Implications for labor markets
(Job/employment placement services statistics)
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
job seekers vacancies new employment
Implication for goods market
• Recently, consumer search (search model for goods market) became the area of much attention.
Main reason ⇒ Internet (Online market)
• Internet dramatically improve the ability to compare the goods, but the search activity is still important (e.g., Position auction).
• Even in online market, there still exist the price dispersion.
• In some cases, price is increased by decreasing search costs.
Lecture plan
1. Sequential search
2. Diamond paradox
3. Random search with wage bargaining
5. Random search with differentiated goods
Related Literature: Survey
Job search
• Rogerson, R., Shimer, R., & Wright, R. (2005). Search-theoretic models of the labor market: A survey. Journal of economic literature, 43(4), 959-988.
• Kircher, P., & Wright, R., & Julien, B., & Guerrieri, V., (2017) Directed Search: A Guided Tour. Discussion paper
• Chade, H., Eeckhout, J., & Smith, L. (2017). Sorting through search and matching models in economics. Journal of Economic Literature, 55(2), 493-544.
• Petrongolo, B., & Pissarides, C. A. (2001). Looking into the black box: A survey of the matching function. Journal of Economic literature, 39(2), 390-431.
Consumer search
• Anderson, S. P., & Renault, R. Firm pricing with consumer search. forthcoming Handbook of Game Theory and Industrial Organization.
