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Endogenous market segmentation with heterogeneous agents

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  • Gautam Bose

Abstract

An explanation is provided for the evolution of segmented marketplaces in a pairwise exchange economy. Large traders operating in a pairwise exchange market prefer to meet other similar traders, because this enables them to trade their endowments in a smaller number of encounters. Large and small traders, however, cannot be distinguished a priori, and the existence of the small traders imposes a negative externality on the large traders. We show that, under conditions which are not very restrictive, establishing a separate market (perhaps with an entry fee) designated for the large traders induces the two types of traders to segment themselves. However, this segmentation is not necessarily welfare improving. Copyright Springer-Verlag Berlin Heidelberg 2003

Suggested Citation

  • Gautam Bose, 2003. "Endogenous market segmentation with heterogeneous agents," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(2), pages 457-467, September.
    • Handle: RePEc:spr:joecth:v:22:y:2003:i:2:p:457-467
    DOI: 10.1007/s00199-002-0319-2
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    Cited by:

    1. Nicolas L. Jacquet & Serene Tan, 2007. "On the Segmentation of Markets," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 639-664, August.

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