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Knife-Edge or Plateau: When do Market Models Tip?

  • Glenn Ellison
  • Drew Fudenberg

This paper studies whether agents must agglomerate at a single location in a class of models of two-sided interaction. In these models there is an increasing returns effect that favors agglomeration, but also a crowding or market-impact effect that makes agents prefer to be in a market with fewer agents of their own type. We show that such models do not tip in the way the term is commonly used. Instead, they have a broad plateau of equilibria with two active markets, and tipping occurs only when one market is below a critical size threshold. Our assumptions are fairly weak, and are satisfied in Krugman's model of labor market pooling, a heterogeneous-agent version of Pagano's asset market model, and Ellison, Fudenberg, and Möbius' model of competing auctions.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 506439000000000098.

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Date of creation: 21 Jan 2003
Date of revision:
Handle: RePEc:cla:levarc:506439000000000098
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  1. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  2. Guy Dumais & Glenn Ellison & Edward L. Glaeser, 2002. "Geographic Concentration As A Dynamic Process," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 193-204, May.
  3. Ellison, Glenn & Fudenberg, Drew & Mobius, Markus, 2010. "Competing Auctions," Staff General Research Papers 32106, Iowa State University, Department of Economics.
  4. repec:oup:restud:v:56:y:1989:i:3:p:317-55 is not listed on IDEAS
  5. repec:oup:restud:v:66:y:1999:i:2:p:219-54 is not listed on IDEAS
  6. Dimitri Vayanos, 1999. "Strategic Trading and Welfare in a Dynamic Market," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 219-254.
  7. repec:oup:qjecon:v:104:y:1989:i:2:p:255-74 is not listed on IDEAS
  8. Ellison, G. & Glaeser, E.L., 1994. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," Working papers 94-27, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Henderson, J V, 1974. "The Sizes and Types of Cities," American Economic Review, American Economic Association, vol. 64(4), pages 640-56, September.
  10. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  11. Fujita, Masahisa, 1988. "A monopolistic competition model of spatial agglomeration : Differentiated product approach," Regional Science and Urban Economics, Elsevier, vol. 18(1), pages 87-124, February.
  12. Gehrig, Thomas, 1998. "Competing markets," European Economic Review, Elsevier, vol. 42(2), pages 277-310, February.
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