“How Optimism without a Common Prior Leads to Price Discovery and Efficiency in a Dynamic Matching Market” by Art SHNEYEROV
We consider a Satterthwaite and Shneyerov (2007)-type dynamic matching and bargaining game (DMBG), but with aggregate uncertainty and without a common prior. Traders initially start out optimistic and then update their beliefs based on their matching experience in the market, using the Bayes rule. It is shown that all separating equilibria converge to perfect competition in the limit as the time between matches tends to 0. The existence of a separating equilibrium is also shown, under rather weak assumptions.