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Trading networks with price-setting agents

Author

Listed:
  • Blume, Lawrence E.
  • Easley, David
  • Kleinberg, Jon
  • Tardos, Éva

Abstract

In a wide range of markets, individual buyers and sellers trade through intermediaries, who determine prices via strategic considerations. Typically, not all buyers and sellers have access to the same intermediaries, and they trade at correspondingly different prices that reflect their relative amounts of power in the market. We model this phenomenon using a game in which buyers, sellers, and traders engage in trade on a graph that represents the access each buyer and seller has to the traders. We show that the resulting game always has a subgame perfect Nash equilibrium, and that all equilibria lead to an efficient allocation of goods. Finally, we analyze trader profits in terms of the graph structure -- roughly, a trader can command a positive profit if and only if it has an "essential" connection in the network, thus providing a graph-theoretic basis for quantifying the amount of competition among traders.

Suggested Citation

  • Blume, Lawrence E. & Easley, David & Kleinberg, Jon & Tardos, Éva, 2009. "Trading networks with price-setting agents," Games and Economic Behavior, Elsevier, vol. 67(1), pages 36-50, September.
  • Handle: RePEc:eee:gamebe:v:67:y:2009:i:1:p:36-50
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    References listed on IDEAS

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    Cited by:

    1. Nermuth, Manfred & Pasini, Giacomo & Pin, Paolo & Weidenholzer, Simon, 2013. "The informational divide," Games and Economic Behavior, Elsevier, vol. 78(C), pages 21-30.
    2. repec:bla:metroe:v:68:y:2017:i:4:p:903-926 is not listed on IDEAS
    3. Marco van der Leij & Daan in 't Veld & Cars Hommes, 2014. "The Formation of a Core Periphery Structure in Heterogeneous Financial Networks," Tinbergen Institute Discussion Papers 14-098/II, Tinbergen Institute, revised 11 Aug 2016.
    4. Bedayo, Mikel & Mauleon, Ana & Vannetelbosch, Vincent, 2016. "Bargaining in endogenous trading networks," Mathematical Social Sciences, Elsevier, vol. 80(C), pages 70-82.
    5. BEDAYO, Mikel & MAULEON, Ana & VANNETELBOSCH, Vincent, 2012. "Bargaining and delay in trading networks," CORE Discussion Papers 2012046, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. repec:kap:compec:v:51:y:2018:i:4:d:10.1007_s10614-017-9658-8 is not listed on IDEAS
    7. Hase, Ryo & Shinomiya, Norihiko, 2016. "A mathematical modeling technique with network flows for social welfare maximization in deregulated electricity markets," Operations Research Perspectives, Elsevier, vol. 3(C), pages 59-66.
    8. Jackson, Matthew O. & Zenou, Yves, 2015. "Games on Networks," Handbook of Game Theory with Economic Applications, Elsevier.
    9. Maryam Farboodi, 2014. "Intermediation and Voluntary Exposure to Counterparty Risk," 2014 Meeting Papers 365, Society for Economic Dynamics.
    10. Alison Watts, 2016. "Auctions Versus Private Negotiations in Buyer-Seller Networks," Games, MDPI, Open Access Journal, vol. 7(3), pages 1-14, August.
    11. Gofman, Michael, 2017. "Efficiency and stability of a financial architecture with too-interconnected-to-fail institutions," Journal of Financial Economics, Elsevier, vol. 124(1), pages 113-146.
    12. repec:eee:jetheo:v:175:y:2018:i:c:p:415-446 is not listed on IDEAS
    13. Zakaria Babutsidze, 2017. "Duopolistic Price Competition with Captives," Metroeconomica, Wiley Blackwell, vol. 68(4), pages 903-926, November.
    14. Hu Lu & Yuntong Wang, 2014. "Efficient trading on a network with incomplete information," Working Papers 1405, University of Windsor, Department of Economics.
    15. Jackson, Matthew O. & Rogers, Brian & Zenou, Yves, 2016. "Networks: An economic perspective," CEPR Discussion Papers 11452, C.E.P.R. Discussion Papers.
    16. Yuval Rabani & Leonard J. Schulman, 2016. "The Invisible Hand of Laplace: the Role of Market Structure in Price Convergence and Oscillation," Papers 1602.07628, arXiv.org.
    17. repec:hrv:hksfac:35165081 is not listed on IDEAS
    18. repec:aea:aecrev:v:107:y:2017:i:11:p:3320-62 is not listed on IDEAS
    19. Jan-Peter Siedlarek, 2012. "Intermediation in Networks," Working Papers 2012.42, Fondazione Eni Enrico Mattei.
    20. Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Trading Networks and Equilibrium Intermediation," Working Paper Series rwp18-001, Harvard University, John F. Kennedy School of Government.
    21. Carlos Lever Guzmán, 2011. "Price Competition on Network," Working Papers 2011-04, Banco de México.
    22. repec:eee:gamebe:v:109:y:2018:i:c:p:565-581 is not listed on IDEAS
    23. 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.
    24. Jan-Peter Siedlarek, 2012. "Intermediation in Networks," Working Papers 2012.42, Fondazione Eni Enrico Mattei.

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    Keywords

    Networks Trade Price formation;

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