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Optimal market thickness

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  • Loertscher, Simon
  • Muir, Ellen V.
  • Taylor, Peter G.

Abstract

Traders that arrive over time give rise to a dynamic tradeoff between the benefits of increasing gains from trade by accumulating traders and the associated cost of delay due to discounting. We analyze this tradeoff in a dynamic bilateral trade model in which a buyer and seller arrive in each period and draw their types independently from commonly known distributions. With symmetric binary types, the optimal market clearing policy can be implemented with posted prices and ex post budget balance, provided that it is optimal to store at least one trader. While optimally thick markets involve storing a small number of traders, their performance is nevertheless close to that of a large market. In particular, irrespective of the type distributions, two-thirds of the gains from increased market thickness can be achieved by storing just one trader.

Suggested Citation

  • Loertscher, Simon & Muir, Ellen V. & Taylor, Peter G., 2022. "Optimal market thickness," Journal of Economic Theory, Elsevier, vol. 200(C).
    • Handle: RePEc:eee:jetheo:v:200:y:2022:i:c:s0022053121002003
    DOI: 10.1016/j.jet.2021.105383
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    Cited by:

    1. Mertikopoulos, Panayotis & Nax, Heinrich H. & Pradelski, Bary S.R., 2024. "Quick or cheap? Breaking points in dynamic markets," Journal of Mathematical Economics, Elsevier, vol. 112(C).
    2. Dilmé, Francesc, 2023. "Bargaining in small dynamic markets," Journal of Economic Theory, Elsevier, vol. 207(C).
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    4. Johannes Baumler & Martin Bullinger & Stefan Kober & Donghao Zhu, 2022. "Superiority of Instantaneous Decisions in Thin Dynamic Matching Markets," Papers 2206.10287, arXiv.org, revised Jun 2023.

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    More about this item

    Keywords

    Market thickness; Dynamic mechanisms; Posted-price mechanisms; Two-sided private information; (Im)possibility of efficient trade;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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