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Community Structure and Market Outcomes: A Repeated Games-in-Networks Approach

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  • Itay P. Fainmesser

Abstract

Consider a large market with asymmetric information, in which sellers have the option to "cheat" their buyers, and buyers decide whether to repurchase from different sellers. We model active trade relationships as links in a buyer-seller network and study repeated games in such networks. Endowing sellers with incomplete knowledge of the network, we derive conditions that determine whether a network is consistent with cooperation between every buyer and seller that are connected. Three network features reduce the minimal discount factor sufficient for cooperation: moderate and balanced competition, sparseness, and segregation. Incentive constraints are binding and rule out efficient networks. (JEL C73, D82, D85, Z13)

Suggested Citation

  • Itay P. Fainmesser, 2012. "Community Structure and Market Outcomes: A Repeated Games-in-Networks Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 4(1), pages 32-69, February.
  • Handle: RePEc:aea:aejmic:v:4:y:2012:i:1:p:32-69
    Note: DOI: 10.1257/mic.4.1.32
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    Citations

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    Cited by:

    1. Nava, Francesco & Piccione, Michele, 2012. "Efficiency in repeated games with local interaction and uncertain local monitoring," LSE Research Online Documents on Economics 54250, London School of Economics and Political Science, LSE Library.
    2. repec:eee:jetheo:v:170:y:2017:i:c:p:289-318 is not listed on IDEAS
    3. Fainmesser, Itay P., 2013. "Social networks and unraveling in labor markets," Journal of Economic Theory, Elsevier, vol. 148(1), pages 64-103.
    4. Jackson, Matthew O. & Zenou, Yves, 2012. "Games on Networks," CEPR Discussion Papers 9127, C.E.P.R. Discussion Papers.
    5. Itay P. Fainmesser & David A. Goldberg, 2011. "Bilateral and Community Enforcement in a Networked Market with Simple Strategies," Working Papers 2011-2, Brown University, Department of Economics.
    6. repec:eee:gamebe:v:107:y:2018:i:c:p:220-237 is not listed on IDEAS
    7. Francesco Nava & Michele Piccione, 2011. "Efficiency in Repeated Two-Action Games with Local Monitoring," STICERD - Theoretical Economics Paper Series 560, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    8. Nava, Francesco & Piccione, Michele, 2014. "Efficiency in repeated games with local interaction and uncertain local monitoring," Theoretical Economics, Econometric Society, vol. 9(1), January.
    9. Carmona, Guilherme & Carvalho, Luís, 2016. "Repeated two-person zero-sum games with unequal discounting and private monitoring," Journal of Mathematical Economics, Elsevier, vol. 63(C), pages 131-138.
    10. Balmaceda, Felipe & Escobar, Juan F., 2017. "Trust in cohesive communities," Journal of Economic Theory, Elsevier, vol. 170(C), pages 289-318.
    11. Alison Watts, 2016. "Auctions Versus Private Negotiations in Buyer-Seller Networks," Games, MDPI, Open Access Journal, vol. 7(3), pages 1-14, August.
    12. Nava, Francesco & Piccione, Michele, 2011. "Efficiency in repeated two-action games with local monitoring," LSE Research Online Documents on Economics 58062, London School of Economics and Political Science, LSE Library.
    13. Arun G. Chandrasekhar & Cynthia Kinnan & Horacio Larreguy, 2014. "Social Networks as Contract Enforcement: Evidence from a Lab Experiment in the Field," NBER Working Papers 20259, National Bureau of Economic Research, Inc.
    14. Jackson, Matthew O. & Zenou, Yves, 2015. "Games on Networks," Handbook of Game Theory with Economic Applications, Elsevier.
    15. Itay Fainmesser, 2014. "Exclusive Intermediation," Working Papers 2014-3, Brown University, Department of Economics.

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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