Market Inefficiency, Entry Order and Coordination

The causes of market inefficiency are many. We suggest an additional cause — buyers’ random entry order. In a market where identical sellers compete for buyers of heterogeneous valuations, first come first served is the norm. Since all buyers choose the cheapest available good, a low-valuation buyer who enters the market late may find the remaining goods unaffordable, which causes markets not to clear. We therefore propose a coordination solution to the market inefficiency problem. We find that in a market where all the high-valuation buyers enter first and all the low-valuation buyers enter afterwards, the market clears effectively. Moreover, we find the inefficiency arising from buyers’ entry order becomes less of a problem in larger economies and vanishes in the limit.