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Search and Endogenous Intermediation: A Model of the Merchant Trader

  • Abhijit Sengupta
  • Gautam Bose

Specialist merchants and traders---agents who mediate the transfer of goods and services between producers and consumers---are central to the economic process, but there are few theoretical models in which the institution of intermediation is an endogenous part of an equilibrium. This paper develops a simple model of the merchant trader in an economy with search frictions. We consider a homogeneous population where each agent, in every period, has a choice between specializing as producers or as merchants, and can switch occupation at any any time. In this economy producers must find trading partners. They may be found in a decentralized search market, but search takes time. Merchants set up trading posts where they offer an immediate trade in return for a commission that each merchant sets every period. Although the location of a merchant's trading post must be discovered through search, producers who are informed of the location of a trading post have the option of returning to deal with the merchant instead of searching anew for trading partners. Formally, we model the interaction among the agents in this economy through time as a stochastic game in which each agent every period chooses an occupation; merchants set their commission rates; and informed producers decide whether to return to their merchants or search for trading partners. We provide a complete characterization of the symmetric Markov perfect equilibria of the game. In particular, we characterize the conditions under which merchants are active in equilibrium and form an ongoing relationship with their informed clients. We also provide conditions under which an equilibrium with no merchants is ``unstable'' against deviations in which a proportion of agents emerge as specialist merchants. Finally, we investigate the welfare properties of equilibria with active merchants

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Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 222.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:222
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