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A Theory of Buyer-Seller Networks

  • Rachel E. Kranton
  • Deborah F. Minehart

This paper introduces a new model of exchange: networks, rather than markets, of buyers and sellers. It begins with the empirically motivated premise that a buyer and seller must have a relationship, a "link," to exchange goods. Networks--buyers, sellers, and the pattern of links connecting them--are common exchange environments. This paper develops a methodology to study network structures and explains why agents may form networks. In a model that captures characteristics of a variety of industries, the paper shows that buyers and sellers, acting strategically in their own self-interests, can form the network structures that maximize overall welfare.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 3 (June)
Pages: 485-508

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:3:p:485-508
Note: DOI: 10.1257/aer.91.3.485
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  1. Ken Hendricks & Michele Piccione & Guofu Tan, 1999. "Equilibria in Networks," Econometrica, Econometric Society, vol. 67(6), pages 1407-1434, November.
  2. Dutta, B. & van den Nouweland, C.G.A.M. & Tijs, S.H., 2003. "Link formation in cooperative situations," Other publications TiSEM 840ac1d0-9e23-41a7-832e-8, Tilburg University, School of Economics and Management.
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  8. John McMillan & Christopher Woodruff, 1998. "Interfirm Relationships and Informal Credit in Vietnam," William Davidson Institute Working Papers Series 132, William Davidson Institute at the University of Michigan.
  9. Michael Rothschild & Gregory J. Werden, 1979. "Returns to Scale From Random Factor Services: Existence and Scope," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 329-335, Spring.
  10. Helper, Susan & Levine, David I, 1992. "Long-Term Supplier Relations and Product-Market Structure," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(3), pages 561-81, October.
  11. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  12. Scheffman, David T & Spiller, Pablo T, 1992. "Buyer's Strategies, Entry Barriers, and Competition," Economic Inquiry, Western Economic Association International, vol. 30(3), pages 418-36, July.
  13. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  14. Riordan, Michael H, 1996. "Contracting with Qualified Suppliers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 115-28, February.
  15. Casella, Alessandra & Rauch, James E., 2002. "Anonymous market and group ties in international trade," Journal of International Economics, Elsevier, vol. 58(1), pages 19-47, October.
  16. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  17. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  18. E. Ray Canterbery, 1984. "Introduction," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 7(1), pages 4-6, October.
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  20. repec:ner:tilbur:urn:nbn:nl:ui:12-77112 is not listed on IDEAS
  21. Cawthorne, Pamela M., 1995. "Of networks and markets: The rise and rise of a South Indian town, the example of Tiruppur's cotton knitwear industry," World Development, Elsevier, vol. 23(1), pages 43-56, January.
  22. Carlton, Dennis W, 1978. "Market Behavior with Demand Uncertainty and Price Inflexibility," American Economic Review, American Economic Association, vol. 68(4), pages 571-87, September.
  23. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September.
  24. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
  25. Leonard, Herman B, 1983. "Elicitation of Honest Preferences for the Assignment of Individuals to Positions," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 461-79, June.
  26. Joel S. Demski & David E.M. Sappington & Pablo T. Spiller, 1987. "Managing Supplier Switching," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 77-97, Spring.
  27. Demange, Gabrielle & Gale, David & Sotomayor, Marilda, 1986. "Multi-Item Auctions," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 863-72, August.
  28. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
  29. Daniel F. Spulber, 1996. "Market Microstructure and Intermediation," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 135-152, Summer.
  30. Rabellotti, Roberta, 1995. "Is there an "industrial district model"? Footwear districts in Italy and Mexico compared," World Development, Elsevier, vol. 23(1), pages 29-41, January.
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