The Long Side of the Market and the Short End of the Stick: Bargaining Power and Price Formation in Buyers', Sellers', and Balanced Markets

Abstract

The determinants of bargaining power and price formation in a dynamic exchange market where new traders enter randomly over time are studied. When agents on the long side of the market possess the option to wait for the arrival of future partners, the terms of trade in the spot market must honor the value of this option. The equilibrium terms of trade are expressed in intuitive closed-form equations that highlight the distinct influences of short-run spot-market conditions and long-run market demographics. Copyright 1995, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.