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Volume of Trade and Dynamic Network Formation in Two-Sided Economies

Author

Listed:
  • Roland Pongou

    () (Department of Economics, University of Ottawa)

  • Roberto Serrano

    () (Department of Economics, Brown University)

Abstract

We study the long-run stability of trade networks in a two-sided economy. Each agent desires relationships with the other side, but having multiple partners is costly. This cost-benefit tradeoff results in each agent having a single-peaked utility over the number of partners-the volume of trade-, the peak being greater for agents on one side than those on the other. We propose a stochastic matching process in which self-interested agents form and sever links over time. Links can be added or deleted, sometimes simultaneously by a single agent. While the unperturbed process yields each pairwise stable network as an absorbing state, stochastic stability in two perturbed processes provides a significant refinement, leading respectively to egalitarian and anti-egalitarian pairwise stable networks. These distinct network configurations have implications for the concentration on each side of the market of a random information shock, which may affect structurally identical economies differently. The analysis captures stylized facts, related to herd behavior, market fragmentation, concentration and contagion asymmetry, in several two-sided economies. It also rationalizes long-run population imbalance between the two sides of certain buyer-seller markets.

Suggested Citation

  • Roland Pongou & Roberto Serrano, 2016. "Volume of Trade and Dynamic Network Formation in Two-Sided Economies," Working Papers 1602E, University of Ottawa, Department of Economics.
  • Handle: RePEc:ott:wpaper:1602e
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    References listed on IDEAS

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    Cited by:

    1. Pongou, Roland & Tondji, Jean-Baptiste, 2018. "Valuing inputs under supply uncertainty: The Bayesian Shapley value," Games and Economic Behavior, Elsevier, vol. 108(C), pages 206-224.
    2. Sylvain Dessy & Setou Diarra & Roland Pongou, 2017. "Underage Brides and Grooms’ Education," Working Papers 1704E, University of Ottawa, Department of Economics.
    3. Pritha Dev & Blessing U. Mberu & Roland Pongou, 2016. "Ethnic Inequality: Theory and Evidence from Formal Education in Nigeria," Economic Development and Cultural Change, University of Chicago Press, vol. 64(4), pages 603-660.
    4. Dessy, Sylvain & Diarra, Setou & Pongou, Roland, 2017. "Underage Brides and Grooms' Education," MPRA Paper 77326, University Library of Munich, Germany.
    5. repec:eee:ecolet:v:162:y:2018:i:c:p:86-92 is not listed on IDEAS

    More about this item

    Keywords

    Two-sided economies; trade networks; pairwise stability; stochastic stability; herd behavior; fragmentation; concentration; contagion asymmetry;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J00 - Labor and Demographic Economics - - General - - - General

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