DP8059 Exclusive Nightclubs and Lonely Hearts Columns: Non-monotone Participation in Optional Intermediation

Author(s): Gianni De Fraja, József Sákovics
Publication Date: October 2010
Keyword(s): dynamic matching, intermediation, Two-sided markets
JEL(s): C78, D40
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8059

In many decentralised markets, the traders who benefit most from an exchange do not employ intermediaries even though they could easily afford them. At the same time, employing intermediaries is not worthwhile for traders who benefit little from trade. Together, these decisions amount to non-monotone participation choices in intermediation: only traders of middle ``type'' employ intermediaries, while the rest, the high and the low types, prefer to search for a trading partner directly. We provide a theoretical foundation for this, hitherto unexplained, phenomenon. We build a dynamic matching model, where a trader's equilibrium bargaining share is a convex increasing function of their types. We also show that this is indeed necessary condition for the existence of non-monotone equilibria.