Bargaining and Competition in Thin Markets

This paper analyzes price dynamics and trade delay in an endogenously-evolving thin market. In the model, buyers and sellers stochastically arrive over time and bargain in bilateral encounters until they trade. Differently from large markets, thin markets may feature trade delay even when buyers and sellers are homogeneous. Price dispersion and trade delay remain significant in the limit where bargaining frictions are small, and transaction prices are mostly determined by the evolution of the number of traders in the market. The market price drifts towards the price in a balanced market and, under some conditions, increments on the interest rate generate mean-preserving spreads of its ergodic distribution.