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A model of market-making

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  • Nicolaas J. Vriend

Abstract

The two essential features of a decentralized economy taken into account are, first, that individual agents need some information about other agents in order to meet potential trading partners, which requires some communication or interaction between these agents, and second, that in general agents will face trading uncertainty. We consider trade in a homogeneous commodity. Firms decide upon their effective supplies, and may create their own markets by sending information signals communicating their willingness to sell. Meeting of potential trading partners is arranged in the form of shopping by consumers. The questions to be considered are: How do firms compete in such markets? And what are the properties of an equilibrium? We establish existence conditions for a symmetric Nash equilibrium in the firms' strategies, and analyze its characteristics. The developed framework appears to lend itself well to study many typical phenomena of decentralized economies, such as the emergence of central markets, the role of middlemen, and price-making.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 184.

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Date of creation: Oct 1996
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Handle: RePEc:upf:upfgen:184

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Decentralized trade; market--making; communication; trading uncertainty; Leex;

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References

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  1. Ionnides, Yannis M, 1990. "Trading Uncertainty and Market Form," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 619-38, August.
  2. John G. Riley & Richard Zeckhauser, 1980. "Optimal Selling Strategies:," UCLA Economics Working Papers 180, UCLA Department of Economics.
  3. Kenneth L. Judd, 1997. "Computational Economics and Economic Theory: Substitutes or Complements," NBER Technical Working Papers 0208, National Bureau of Economic Research, Inc.
  4. Gould, John P, 1980. "The Economics of Markets: A Simple Model of the Market-making Process," The Journal of Business, University of Chicago Press, vol. 53(3), pages S167-87, July.
  5. repec:fth:louvco:8826 is not listed on IDEAS
  6. Drazen, Allan, 1980. "Recent Developments in Macroeconomic Disequilibrium Theory," Econometrica, Econometric Society, Econometric Society, vol. 48(2), pages 283-306, March.
  7. Green, Jerry, 1980. "On the Theory of Effective Demand," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(358), pages 341-53, June.
  8. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
  9. Foley, Duncan K, 1975. "On Two Specifications of Asset Equilibrium in Macroeconomic Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 303-24, April.
  10. GARY-BOBO, R. & LESNE, J.-Ph., 1988. "Advertising strategies and competition in a Chamberlinian market model," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1988026, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Shubik, Martin, 1975. "The General Equilibrium Model Is Incomplete and Not Adequate for the Reconciliation of Micro and Macroeconomic Theory," Kyklos, Wiley Blackwell, vol. 28(3), pages 545-73.
  12. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
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Cited by:
  1. Rosemarie Nagel & Nicolaas J. Vriend, 1997. "An experimental study of adaptive behavior in an oligopolistic market game," Economics Working Papers 230, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Tomas Klos, 1999. "Governance and Matching," Computing in Economics and Finance 1999 341, Society for Computational Economics.
  3. Kutschinski, Erich & Uthmann, Thomas & Polani, Daniel, 2003. "Learning competitive pricing strategies by multi-agent reinforcement learning," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 27(11-12), pages 2207-2218, September.

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