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Formation of Decentralized Manufacturer-Supplier Networked Market

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  • Yasuhiro Shirata

Abstract

This paper studies trading in a two-sided market where firms strategically form a network. In a networked market, manufacturers and suppliers must be connected by links for trading. We show that if no contingent contract is available, then any pairwise Nash stable network is inefficient. Each supplier under-invests in links (a hold-up problem). If a contract contingent on direct links is available and link cost is low, then the under-investment problem solves. Furthermore, the complete network resulting in the Walrasian outcome is uniquely pairwise Nash stable. However, this outcome is also inefficient. A new hold-up problem, over-investment in links, arises.

Suggested Citation

  • Yasuhiro Shirata, 2011. "Formation of Decentralized Manufacturer-Supplier Networked Market," Global COE Hi-Stat Discussion Paper Series gd11-186, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hst:ghsdps:gd11-186
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    File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd11-186.pdf
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    References listed on IDEAS

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    1. Bloch, Francis & Jackson, Matthew O., 2007. "The formation of networks with transfers among players," Journal of Economic Theory, Elsevier, vol. 133(1), pages 83-110, March.
    2. Shirata, Yasuhiro, 2017. "First price package auction with many traders," Journal of Mathematical Economics, Elsevier, vol. 69(C), pages 71-83.
    3. Francis Bloch & Matthew Jackson, 2006. "Definitions of equilibrium in network formation games," International Journal of Game Theory, Springer;Game Theory Society, vol. 34(3), pages 305-318, October.
    4. Douglas Gale & Hamid Sabourian, 2005. "Complexity and Competition," Econometrica, Econometric Society, vol. 73(3), pages 739-769, May.
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