A theory of market microstructure and reputation

Abstract

The paper investigates the properties of the equilibrium outcomes and the microstructure of the markets where the sellers announce their demands but do not necessarily commit, while the buyers move back and forth between the sellers to negotiate for a better deal by extending the analysis of the multilateral bargaining problem introduced in Ozyurt (2009). When the sellers are constrained to announce their prices before the buyer's arrival at their stores, the unique equilibrium outcome is in Bertrand fashion. However, this uniqueness result is not robust to perturbation on higher order beliefs regarding the players' commitment types. If the sellers compete in the spirit of Diamond (1971), then a continuum of prices can be supported in equilibrium. However, independent of the sellers' announcements, the payoff to the seller (visited by the buyer first) is always the same, and the buyer's payoff approaches a unique limit as the initial priors vanish.