Competitive Cooperation

Abstract

I present a theoretical inquiry into the market behaviors under search frictions. I use the construct of directed search framework and extend this literature to incorporate some realistic features that have not yet been considered thoroughly in the existing literature. The thesis organize as follows: Chapter 1, Introduction This chapter provides an explanation of some background, especially in relation to bargaining models and directed search models that are used in latter chapters, and summarized the contents in Chapter 2-4. Chapter 2, A Cooperative Game with Coordination Frictions This chapter analyzed a directed search model to investigate the searching process of bilateral partnerships, where the action set of the partnership features non-transferable utility, so that multi-dimensional cooperative behavior can be accommodated. The contribution of this chapter comes two-folded. Firstly, when the payoff set is strictly convex, sellers will post fixed contracts although they are allowed to post a variety of state-contingent contracts. Then, the unique equilibrium contract takes the form of the asymmetric Nash bargaining solution, where the relative bargaining power is a function of the number of market participants. I also showed the flexibility of the model by analyzing multiple applications. Chapter 3, Pricing and Quality Provision of a Frictional Market This chapter presents a directed search model a la Burdett, Shi and Wright (2001) which incorporates costly production which has to happen before seller entering into the market. Production requires effort costs of sellers and generates a higher consumption utility of buyers, e.g., a higher quality. As expected, this production-in-advance requirement causes a holdup problem and under-investment issues. Chapter 4, Competitive Cooperation This chapter generalized the model with incorporating the bidding structure a la Julien, Kennes and King (2000). I showed that the under-investment result obtained in chapter 3 holds true even under the bidding trading mechanism.