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Knife Edge of Plateau: When Do Market Models Tip?

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  • Glenn Ellison
  • Drew Fudenberg

Abstract

This paper studies whether agents must agglomerate at a single location in a class of models of two-sided interaction. In these models there is an increasing returns effect that favors agglomeration, but also a crowding or market-impact effect that makes agents prefer to be in a market with fewer agents of their own type. We show that such models do not tip in the way the term is commonly used. Instead, they have a broad plateau of equilibria with two active markets, and tipping occurs only when one market is below a critical size threshold. Our assumptions are fairly weak, and are satisfied in Krugman's [1991b] model of labor market pooling, a heterogeneous-agent version of Pagano's [1989] asset market model, and Ellison, Fudenberg and M”bius's [2002] model of competing auctions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9528.

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Date of creation: Mar 2003
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Publication status: published as Glenn Ellison & Drew Fudenberg, 2003. "Knife-Edge Or Plateau: When Do Market Models Tip?," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1249-1278, November.
Handle: RePEc:nbr:nberwo:9528

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  1. Henderson, J V, 1974. "The Sizes and Types of Cities," American Economic Review, American Economic Association, American Economic Association, vol. 64(4), pages 640-56, September.
  2. Dimitri Vayanos, 1999. "Strategic trading and welfare in a dynamic market," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 449, London School of Economics and Political Science, LSE Library.
  3. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 57(6), pages 1243-77, November.
  4. Glenn Allison & Drew Fudenberg, 2002. "Competing Auctions," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1960, Harvard - Institute of Economic Research.
  5. Ellison, Glenn & Glaeser, Edward L, 1997. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(5), pages 889-927, October.
  6. Pagano, Marco, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 255-74, May.
  7. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(3), pages 483-99, June.
  8. Gehrig, Thomas, 1998. "Competing markets," European Economic Review, Elsevier, Elsevier, vol. 42(2), pages 277-310, February.
  9. Guy Dumais & Glenn Ellison & Edward Glaeser, 1997. "Geographic Concentration as a Dynamic Process," NBER Working Papers 6270, National Bureau of Economic Research, Inc.
  10. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(3), pages 317-55, July.
  11. Fujita, Masahisa, 1988. "A monopolistic competition model of spatial agglomeration : Differentiated product approach," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 18(1), pages 87-124, February.
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