A model of random matching and price formation

We study a model where buyers and sellers meet randomly. The meeting probab ilities are endogenous and are derived from the basics of the model. The ag ents can decide to either search or wait, and the searchers are distributed on the waiters. Prices are determined by bargaining if exactly two agents are matched. If more than one agent of one type are matched with an agent o f another type an auction ensues. There exist at most three equilibria, and when the numbers of buyers and sellers differ greatly one can argue that t he equilibrium where the agents on the short side wait is the plausible one . We also study the relation of the model to the Walrasian markets, as well as to random matching models with bargaining only or auction only. (C) 200 0 Elsevier Science B.V. All rights reserved. JEL classification: C78; D40; D44; D83.