Middlemen, inventories and economic dynamics

We study dynamics in frictional markets with intermediated trade, where middlemen can buy goods or assets from sellers, hold them as inventory, and sell when contacting appropriate buyers. Importantly, buyers have heterogeneous match-specific valuations, letting us characterize equilibrium in terms of reservation trading strategies (related papers with homogeneous valuations imply bang-bang solutions that are awkward for the economics and mathematics). Using bifurcation theory, we show there are equilibria where market participation, volume, prices, liquidity and other variables fluctuate as self-fulfilling prophecies. The dynamics emerge from strategic considerations, not mechanical assumptions, like increasing returns or other such devices in related models.