Endogenous Inequality in Decentralized Two-Sided Markets

This paper examines whether and under what conditions one should expect equilibrium inequality in markets where agents in each of two populations look for an optimal alternative from the other population through a costly sequential search. It shows that a unique stable equilibrium may involve inequality between ex ante identical populations, especially if search costs are low. A consequence is that a one-time intervention to correct inequality in a repeated game may not achieve a lasting equality outcome. In addition, in such markets, a search cost reduction may increase inequality by increasing expected payoffs in one population and reducing them in the other. Even worse, a search cost reduction may reduce the sum of all payoffs, that is, reduce the social welfare. Furthermore, allowing individual agents to offer monetary payments to facilitate acceptance by the counterparty may increase inequality and make the disadvantaged population even more worse off.