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Intermediation in Networks

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  • Jan-Peter Siedlarek

    (Department of Economics, European University Institute)

Abstract

This paper studies bargaining and exchange in a networked market with intermediation. Possibilities to trade are restricted through a network of existing relationships and traders bargain over the division of available gains from trade along different feasible routes. Using a stochastic model of bargaining, I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study efficiency and the relationship between network structure and payoffs. In equilibrium, trade is never unduly delayed but it may take place too early and in states where delay would be efficient. The inefficiency arises from a hold-up threat and the inability of bargaining parties credibly to commit to a split in a future period. The model also shows how with competing trade routes as trade frictions go to zero agents that are not essential to a trade opportunity receive a payoff of zero.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2012.42.

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Date of creation: May 2012
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Handle: RePEc:fem:femwpa:2012.42

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Related research

Keywords: Stochastic Games; Bargaining; Random Matching; Middlemen; Network;

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  1. Matthew O. Jackson & Sandro Brusco, 1997. "The Optimal Design of a Market," Discussion Papers 1186, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
  3. Douglas M. Gale & Shachar Kariv, 2007. "Financial Networks," American Economic Review, American Economic Association, vol. 97(2), pages 99-103, May.
  4. Ana Babus, 2011. "Strategic Relationships in Over-the-Counter Markets," 2011 Meeting Papers 1405, Society for Economic Dynamics.
  5. Blume, Lawrence E. & Easley, David & Kleinberg, Jon & Tardos, √Čva, 2009. "Trading networks with price-setting agents," Games and Economic Behavior, Elsevier, vol. 67(1), pages 36-50, September.
  6. Goyal, Sanjeev & Vega-Redondo, Fernando, 2007. "Structural holes in social networks," Journal of Economic Theory, Elsevier, vol. 137(1), pages 460-492, November.
  7. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  8. Mihai Manea, 2011. "Bargaining in Stationary Networks," American Economic Review, American Economic Association, vol. 101(5), pages 2042-80, August.
  9. Merlo, Antonio & Wilson, Charles A, 1995. "A Stochastic Model of Sequential Bargaining with Complete Information," Econometrica, Econometric Society, vol. 63(2), pages 371-99, March.
  10. Corominas-Bosch, Margarida, 2004. "Bargaining in a network of buyers and sellers," Journal of Economic Theory, Elsevier, vol. 115(1), pages 35-77, March.
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Cited by:
  1. BEDAYO, Mikel & MAULEON, Ana & VANNETELBOSCH, Vincent, 2012. "Bargaining and delay in trading networks," CORE Discussion Papers 2012046, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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