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Markets, Bargaining, and Networks with Heterogeneous Agents

Author

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  • Arnold Polanski

    (University of East Anglia)

  • Fernando Vega-Redondo

    (European University Institute)

Abstract

The paper proposes an intertemporal model of bargaining among heterogeneous buyers and sellers placed on a bipartite network. First, it characterizes conditions on the network under which its trading restrictions are inessential and the outcome is arbitrage-free. Instead, when the system is segmented in different trading components, we show how these come about and how prices are determined in each of them. Second, we turn to the issue of network endogeneity, focusing on those networks that are Pairwise Stable. Such networks are shown to always exist and be arbitrage-free. In the latter respect, therefore, they satisfy one of the key properties displayed by frictionless markets. We identify, however, a sharp contrast regarding another key feature: Pairwise-Stable networks are generically inefficient if the matching process is genuinely decentralized. This uncovers a fundamental incompatibility between individual incentives and social welfare in endogenous trading networks. We explain that such incompatibility is not only due to buyer/seller heterogeneity but is also caused by the incentives underlying network formation in a trading context.

Suggested Citation

  • Arnold Polanski & Fernando Vega-Redondo, 2013. "Markets, Bargaining, and Networks with Heterogeneous Agents," University of East Anglia Applied and Financial Economics Working Paper Series 038, School of Economics, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:aepppr:2012_38
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    File URL: https://archive.uea.ac.uk/menu/depts/eco/research/RePEc/uea/papers_pdf/UEA-AFE-038.pdf
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    References listed on IDEAS

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    1. Shneyerov, Artyom & Wong, Adam Chi Leung, 2010. "Bilateral matching and bargaining with private information," Games and Economic Behavior, Elsevier, vol. 68(2), pages 748-762, March.
    2. Serrano, Roberto, 2002. "Decentralized information and the Walrasian outcome: a pairwise meetings market with private values," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 65-89, September.
    3. Arnold Polanski & Emiliya Lazarova, 2015. "Dynamic multilateral markets," International Journal of Game Theory, Springer;Game Theory Society, vol. 44(4), pages 815-833, November.
    4. Gianni De Fraja & Jozsef Sakovics, 2001. "Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 842-863, August.
    5. Lauermann, Stephan, 2012. "Asymmetric information in bilateral trade and in markets: An inversion result," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1969-1997.
    6. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
    7. Corominas-Bosch, Margarida, 2004. "Bargaining in a network of buyers and sellers," Journal of Economic Theory, Elsevier, vol. 115(1), pages 35-77, March.
    8. Mihai Manea, 2011. "Bargaining in Stationary Networks," American Economic Review, American Economic Association, vol. 101(5), pages 2042-2080, August.
    9. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-1150, September.
    10. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
    11. Ariel Rubinstein & Asher Wolinsky, 1990. "Decentralized Trading, Strategic Behaviour and the Walrasian Outcome," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 63-78.
    12. Polanski, Arnold, 2007. "Bilateral bargaining in networks," Journal of Economic Theory, Elsevier, vol. 134(1), pages 557-565, May.
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    Cited by:

    1. Arnold Polanski & Emiliya Lazarova, 2015. "Dynamic multilateral markets," International Journal of Game Theory, Springer;Game Theory Society, vol. 44(4), pages 815-833, November.
    2. Donna, Javier & Schenone, Pablo & Veramendi, Gregory, 2015. "Networks, Frictions, and Price Dispersion," MPRA Paper 66999, University Library of Munich, Germany.
    3. Gauer, F. & Hellmann, T., 2017. "Strategic formation of homogeneous bargaining networks," Games and Economic Behavior, Elsevier, vol. 106(C), pages 51-74.
    4. Hellmann, Tim & Landwehr, Jakob, 2014. "Stable Networks in Homogeneous Societies," Center for Mathematical Economics Working Papers 517, Center for Mathematical Economics, Bielefeld University.

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