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Evolutionary stability of bargaining and price posting: implications for formal and informal activities

Author

Listed:
  • Nejat Anbarci

    (Deakin University)

  • Pedro Gomis-Porqueras

    (Deakin University)

  • Marcus Pivato

    (Department of Mathematics at Trent University
    Université de Cergy-Pontoise)

Abstract

In this paper we study the co-existence of two well known trading protocols, bargaining and price-posting. To do so we consider a frictional environment where buyers and sellers play price-posting and bargaining games infinitely many times. Sellers switch from one market to the other at a rate that is proportional to their payoff differentials. Given the different informational requirements associated with these two trading mechanisms, we examine their possible co-existence in the context of informal and formal markets. Other than having different trading protocols, we also consider other distinguishing features. We find a unique stable equilibrium where price-posting (formal markets) and bargaining (informal markets) co-exist. In a richer environment where both sellers and buyers can move across markets, we show that there exists a unique stable dynamic equilibrium where formal and informal activities also co-exist whenever sellers’ and buyers’ net costs of trading in the formal market have opposite signs.

Suggested Citation

  • Nejat Anbarci & Pedro Gomis-Porqueras & Marcus Pivato, 2018. "Evolutionary stability of bargaining and price posting: implications for formal and informal activities," Journal of Evolutionary Economics, Springer, vol. 28(2), pages 365-397, April.
    • Handle: RePEc:spr:joevec:v:28:y:2018:i:2:d:10.1007_s00191-017-0544-2
    DOI: 10.1007/s00191-017-0544-2
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    More about this item

    Keywords

    Price posting; Bargaining; Formal and informal sectors;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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