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Volume of trade and dynamic network formation in two-sided economies

Roland Pongou () and Roberto Serrano

Journal of Mathematical Economics, 2016, vol. 63, issue C, 147-163

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 also 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 most buyer–seller markets.

Keywords: Two-sided economies and trade networks; Pairwise stability; Stochastic stability; Herd behavior and market concentration; Market fragmentation; Contagion (search for similar items in EconPapers)
Date: 2016
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Working Paper: Volume of Trade and Dynamic Network Formation in Two-Sided Economies (2016) Downloads
Working Paper: Volume of Trade and Dynamic Network Formation in Two-Sided Economies (2013) Downloads
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DOI: 10.1016/j.jmateco.2016.01.003

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