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Formation of Decentralized Manufacturer-Supplier Networked Market

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  • Yasuhiro Shirata
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    Abstract

    This paper studies trading in a two-sided market where firms strategically form a network. In a networked market, manufacturers and suppliers must be connected by links for trading. We show that if no contingent contract is available, then any pairwise Nash stable network is inefficient. Each supplier under-invests in links (a hold-up problem). If a contract contingent on direct links is available and link cost is low, then the under-investment problem solves. Furthermore, the complete network resulting in the Walrasian outcome is uniquely pairwise Nash stable. However, this outcome is also inefficient. A new hold-up problem, over-investment in links, arises.

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    File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd11-186.pdf
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    Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd11-186.

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    Date of creation: Apr 2011
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    Handle: RePEc:hst:ghsdps:gd11-186

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    1. Francis Bloch & Matthew Jackson, 2006. "Definitions of equilibrium in network formation games," International Journal of Game Theory, Springer, vol. 34(3), pages 305-318, October.
    2. Bloch, Francis & Jackson, Matthew O., 2007. "The formation of networks with transfers among players," Journal of Economic Theory, Elsevier, vol. 133(1), pages 83-110, March.
    3. Douglas Gale & Hamid Sabourian, 2005. "Complexity and Competition," Econometrica, Econometric Society, vol. 73(3), pages 739-769, 05.
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