Sequential bargaining and competition

Summary This paper studies a sequential bargaining model of a decentralised market. A main objective is to explore the conditions under which the unique subgame perfect equilibrium outcome of the market game approximates the Walrasian outcome of the market. The three main messages that emerge from our results are as follows. First, contrary to conventional wisdom, frictionless markets need not be Walrasian. Second, the relative magnitudes of frictions can have a profound impact on the market outcome even in the limit as the absolute magnitudes of the frictions become negligible. And third, the relative magnitudes of certain types of frictions may have to be significantly large in order for markets to be Walrasian, reflecting that certain types of frictions are needed in the market in order to induce the Walrasian outcome.This paper is based on a chapter of my Ph.D. thesis. I would like to thank Ken Binmore, David Canning, Partha Dasgupta and Frank Hahn for their helpful comments. I owe special thanks to Ariel Rubinstein for his comments, remarks and encouragement. The comments and suggestions of an anonymous referee have significantly improved the exposition at several places.