Stability and Bayesian Consistency in Two-Sided Markets
- (pp. 2625-66)
Abstract
We propose a criterion of stability for two-sided markets with asymmetric information. A central idea is to formulate off-path beliefs conditional on counterfactual pairwise deviations and on-path beliefs in the absence of such deviations. A matching-belief configuration is stable if the matching is individually rational with respect to the system of on-path beliefs and is not blocked with respect to the system of off-path beliefs. The formulation provides a language for assessing matching outcomes with respect to their supporting beliefs and opens the door to further belief-based refinements. The main refinement analyzed in the paper requires the Bayesian consistency of on-path and off-path beliefs with prior beliefs. We define concepts of Bayesian efficiency, the rational expectations competitive equilibrium, and the core. Their contrast with pairwise stability manifests the role of information asymmetry in matching formation.Citation
Liu, Qingmin. 2020. "Stability and Bayesian Consistency in Two-Sided Markets." American Economic Review, 110 (8): 2625-66. DOI: 10.1257/aer.20181186Additional Materials
JEL Classification
- C78 Bargaining Theory; Matching Theory
- D40 Market Structure, Pricing, and Design: General
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness