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Community Structure and Market Outcomes: A Repeated Games in Networks Approach

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Abstract

Consider a large market with asymmetric information, in which sellers choose whether to cooperate or deviate and ?cheat?their buyers, and buyers decide whether to re-purchase from di¤erent sellers. We model active trade relationships as links in a buyer-seller network and suggest a framework for studying repeated games in such networks. In our framework, buyers and sellers have rich yet incomplete knowledge of the network structure; allowing us to derive meaningful conditions that determine whether a network is consistent with trade and cooperation between every buyer and seller that are connected. We show that three network features reduce the minimal discount factor necessary for sustaining cooperation: moderate competition, sparseness, and segregation. We ? nd that the incentive constraints rule out networks that maximize the volume of trade and that the constrained trade maximizing networks are in between ?old world? segregated and sparse networks, and a ?global market?

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Bibliographic Info

Paper provided by Brown University, Department of Economics in its series Working Papers with number 2010-14.

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Date of creation: 2010
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Handle: RePEc:bro:econwp:2010-14

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Postal: Department of Economics, Brown University, Providence, RI 02912

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Keywords: Buyer-Seller networks; repeated games; moral hazard; asymmetric information; trust; cooperation; institutions;

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Citations

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Cited by:
  1. Itay Fainmesser, 2010. "Social Networks and Unraveling in Labor Markets," Working Papers 2010-15, Brown University, Department of Economics.
  2. Itay P. Fainmesser & David A. Goldberg, 2011. "Bilateral and Community Enforcement in a Networked Market with Simple Strategies," Working Papers 2011-2, Brown University, Department of Economics.
  3. Felipe Balmaceda & Juan Esconar, 2013. "Trust in Cohesive Communities," Documentos de Trabajo 295, Centro de Economía Aplicada, Universidad de Chile.
  4. Francesco Nava & Michele Piccione, 2011. "Efficiency in Repeated Two-Action Games with Local Monitoring," STICERD - Theoretical Economics Paper Series /2012/560, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  5. Itay Fainmesser, 2014. "Exclusive Intermediation," Working Papers 2014-3, Brown University, Department of Economics.
  6. Francesco Nava & Michele Piccione, 2012. "Efficiency in repeated games with local interaction and uncertain local monitoring," LSE Research Online Documents on Economics 54250, London School of Economics and Political Science, LSE Library.
  7. Nava, Francesco & Piccione, Michele, 2014. "Efficiency in repeated games with local interaction and uncertain local monitoring," Theoretical Economics, Econometric Society, vol. 9(1), January.

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