Searching for a Bargain: Power of Strategic Commitment

It is common to think of reputation as assets –things of value that require costly investments to build, that can deteriorate if not maintained attentively. This paper shows that under reputational concerns, the equilibrium outcome of a highly competitive market may not be Walrasian. In particular, the incentive of committing to a specific share, the opportunity of building reputation about inflexibility and the anxiety to preserve their reputation can provide significant market power to the players that are in the long side of the market, even when frictions are negligible. ∗This research was supported by the Marie Curie International Reintegration Grant (# 256486) within the European Community Framework Programme. I would like to thank David Pearce, Wolfgang Pesendorfer, Larry Samuelson, Mehmet Ekmekçi, Ennio Stacchetti, Kalyan Chatterjee, Vijay Krishna, Ariel Rubinstein, Alessandro Lizzeri and Tomasz Sadzik for helpful comments and suggestions. I also thank seminar participants at Caltech, Penn State, the Econometric Society World Congress 2010 in Shanghai, the 2 Brazilian Workshop of the Game Theory Society 2010 in Brazil, TOBB, METU, the Midwest Theory Conference 2010 in Evanston, Econometric Society Meeting 2009 in Boston, ASSET 2009, SWET 2009, Carnegie Mellon (Tepper Business School), New York University, Maastricht, LUISS Guido Carli, Koc, Sabanci, Bogazici and Bilkent. All the remaining errors are my own. †Faculty of Arts and Social Sciences, Sabancı University, 34956, Istanbul, Turkey. (e-mail: [email protected])