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

Roland Pongou and Roberto Serrano

No 1602E, Working Papers from University of Ottawa, Department of Economics

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.

Keywords: Two-sided economies; trade networks; pairwise stability; stochastic stability; herd behavior; fragmentation; concentration; contagion asymmetry (search for similar items in EconPapers)
JEL-codes: C73 D01 D03 D85 F16 J00 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2016
New Economics Papers: this item is included in nep-gth, nep-mic and nep-net
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Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Volume of trade and dynamic network formation in two-sided economies (2016)
Working Paper: Volume of Trade and Dynamic Network Formation in Two-Sided Economies (2013)
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