TY - JOUR
T1 - Endogenous two-sided markets with repeated transactions
AU - Polanski, Arnold
AU - Winter, Eyal
PY - 2010
Y1 - 2010
N2 - We consider homogeneous two-sided markets, in which connected buyer-seller pairs bargain and trade repeatedly. In this infinite market game with exogenous matching probabilities and a common discount factor, we prove the existence of equilibria in stationary strategies. The equilibrium payoffs are given implicitly as a solution to a system of linear equations. Then, we endogenize the matching mechanism in a link formation stage that precedes the market game. When agents are sufficiently patient and link costs are low, we provide an algorithm to construct minimally connected networks that are pairwise stable with respect to the expected payoffs in the trading stage. The constructed networks are essentially efficient and consist of components with a constant buyer-seller ratio. The latter ratio increases (decreases) for a buyer (seller) that deletes one of her links in a pairwise stable component.
AB - We consider homogeneous two-sided markets, in which connected buyer-seller pairs bargain and trade repeatedly. In this infinite market game with exogenous matching probabilities and a common discount factor, we prove the existence of equilibria in stationary strategies. The equilibrium payoffs are given implicitly as a solution to a system of linear equations. Then, we endogenize the matching mechanism in a link formation stage that precedes the market game. When agents are sufficiently patient and link costs are low, we provide an algorithm to construct minimally connected networks that are pairwise stable with respect to the expected payoffs in the trading stage. The constructed networks are essentially efficient and consist of components with a constant buyer-seller ratio. The latter ratio increases (decreases) for a buyer (seller) that deletes one of her links in a pairwise stable component.
KW - Decentralized trading
KW - Endogenous network formation
KW - Market structure
KW - Two-sided markets
UR - http://www.scopus.com/inward/record.url?scp=77950543225&partnerID=8YFLogxK
U2 - 10.2202/1935-1704.1632
DO - 10.2202/1935-1704.1632
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AN - SCOPUS:77950543225
SN - 1534-5955
VL - 10
JO - B.E. Journal of Theoretical Economics
JF - B.E. Journal of Theoretical Economics
IS - 1
M1 - 11
ER -