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Bilateral and Community Enforcement in a Networked Market with Simple Strategies

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Abstract

We present a model of repeated games in large buyer-seller networks in the presence of reputation networks via which buyers share information about past transactions. The model allows us to characterize cooperation networks - networks in which each seller cooperates (by providing high quality goods) with every buyer that is connected to her. To this end, we provide conditions under which: [1] the incentives of a seller s to cooperate depend only on her beliefs with respect to her local neighborhood - a subnetwork that includes seller s and is of a size that is independent of the size of the entire network; and [2] the incentives of a seller s to cooperate can be calculated as if the network was a random tree with seller s at its root. Our characterization sheds light on the welfare costs of relying only on repeated interactions for sustaining cooperation, and on how to mitigate such costs.

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  • 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.
    • Handle: RePEc:bro:econwp:2011-2
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    Cited by:

    1. Itay Fainmesser, 2010. "Community Structure and Market Outcomes: A Repeated Games in Networks Approach," Working Papers 2010-14, Brown University, Department of Economics.
    2. Francesco Nava & Michele Piccione, 2011. "Efficiency in Repeated Two-Action Games with Local Monitoring," STICERD - Theoretical Economics Paper Series 560, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    3. Nava, Francesco & Piccione, Michele, 2011. "Efficiency in repeated two-action games with local monitoring," LSE Research Online Documents on Economics 58062, London School of Economics and Political Science, LSE Library.
    4. Itay Fainmesser, 2010. "Social Networks and Unraveling in Labor Markets," Working Papers 2010-15, Brown University, Department of Economics.
    5. Itay P. Fainmesser, 2012. "Community Structure and Market Outcomes: A Repeated Games-in-Networks Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 4(1), pages 32-69, February.
    6. Fainmesser, Itay P., 2013. "Social networks and unraveling in labor markets," Journal of Economic Theory, Elsevier, vol. 148(1), pages 64-103.

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    Keywords

    Networks; moral hazard; graph theory; repeated games;
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