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Trading Networks and Equilibrium Intermediation

Author

Listed:
  • Kotowski, Maciej H.

    (Harvard University)

  • Leister, C. Matthew

    (Monash University)

Abstract

We study an economy where intermediaries facilitate exchange between a supplier and consumers. The set of feasible transactions is characterized by a network. Free entry helps form the network. There is under-entry of intermediaries in equilibrium due to complementarities among agents in distant parts of the economy. When intermediaries are speculators, equilibrium networks exhibit an asymmetric structure that amplifies certain traders’ importance. An extension of the model allows for disintermediation. Generally, free-entry and competition may fail to purge redundant intermediaries from the market. However, avoidance of a reseller’s curse deters superfluous speculators.

Suggested Citation

  • 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.
  • Handle: RePEc:ecl:harjfk:rwp18-001
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    File URL: https://research.hks.harvard.edu/publications/getFile.aspx?Id=1615
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    References listed on IDEAS

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    Cited by:

    1. Vasco M. Carvalho, 2014. "From Micro to Macro via Production Networks," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 23-48, Fall.
    2. Han, Lining & Juarez, Ruben, 2018. "Free intermediation in resource transmission," Games and Economic Behavior, Elsevier, vol. 111(C), pages 75-84.
    3. Victor Amelkin & Rakesh Vohra, 2019. "Strategic Formation and Reliability of Supply Chain Networks," Papers 1909.08021, arXiv.org, revised Jan 2020.
    4. Choi, S. & Goyal, S. & Moisan, F., 2020. "Brokerage," Cambridge Working Papers in Economics 2005, Faculty of Economics, University of Cambridge.
    5. Syngjoo Choi & Andrea Galeotti & Sanjeev Goyal, 2017. "Trading in Networks: Theory and Experiments," Journal of the European Economic Association, European Economic Association, vol. 15(4), pages 784-817.
    6. Kostas Bimpikis & Ozan Candogan & Shayan Ehsani, 2019. "Supply Disruptions and Optimal Network Structures," Management Science, INFORMS, vol. 65(12), pages 5504-5517, December.
    7. Kariv, Shachar & Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Liquidity risk in sequential trading networks," Games and Economic Behavior, Elsevier, vol. 109(C), pages 565-581.
    8. Balbuzanov, Ivan & Kotowski, Maciej, 2019. "The Property Rights Theory of Production Networks," Working Paper Series rwp19-033, Harvard University, John F. Kennedy School of Government.

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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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