Multiple equilibria in bargaining models of decentralized trade

Summary A market in which population size is endogenously determined is modeled. Buyers and sellers are randomly matched upon entering the market, whereupon they engage in non-cooperative bilateral bargaining. It is shown that general matching technologies and heterogeneity of buyer or seller populations often result in multiple market equilibria. Up to four equilibria can occur and the equilibria can always be ranked according to population size. Under some conditions all equilibria can also be Pareto ranked. The set of equilibria depends on the relative population sizes of different types of potential entrant, market entry costs, and the degree of differentiation between agents on the same side of the market.This paper evolved from a chapter in my dissertation. I am indebted to Leo Simon for many helpful conversations. Michael Hanemann, Jeff Perloff, Stefan Reichelstein, Jim Vercammen, Brian Wright, and participants in seminars at U.C. Berkeley, the University of Maryland, the University of British Columbia and the Australian National University also provided useful comments. Lastly, I benefited greatly from the thorough comments and corrections provided by an anonymous referee.