Job seekers do not search for work randomly. They check newspapers and job centres for information on vacancies and then contact advertisers of suitable vacancies directly. Indeed, in most markets there is usually an established marketplace where traders meet. In Discussion Paper No. 1048, Melvyn Coles and Eric Smith model equilibrium trading patterns when marketplaces exist and goods are differentiated. When first visiting the market, a buyer samples a stock of goods. If fortunate, the buyer matches with and purchases one of these goods and then exits the market. If an initial match does not exist, the buyer can now only match with the flow of new goods for sale. The previous stock has been sampled and rejected. In a steady state, the current stock of unmatched traders on one side of the market is trying to match with the flow of new traders on the other side. It is shown that this market behaviour depicts matching patterns between unemployed job seekers and vacancies in UK Job Centres.

The returns to scale in matching have important implications for the search literature. For example, it is possible to obtain multiple equilibria, assuming a matching function with increasing returns. This result suggests that unemployment `traps' might arise with decentralized trade. Alternatively, trade cycles can arise when there are increasing returns.

Marketplaces and Matching
Melvyn G Coles and Eric Smith

Discussion Paper No. 1048, October 1994 (HR)