Knife-Edge or Plateau: When Do Market Models Tip?

Glenn Ellison () and Drew Fudenberg

The Quarterly Journal of Economics, 2003, vol. 118, issue 4, 1249-1278

Abstract: This paper studies whether agents must agglomerate at a single location in a class of models of two-sided interaction. In these models there is an increasing returns effect that favors agglomeration, but also a crowding or market-impact effect that makes agents prefer to be in a market with fewer agents of their own type. We show that such models do not tip in the way the term is commonly used. Instead, they have a broad plateau of equilibria with two active markets, and tipping occurs only when one market is below a critical size threshold. Our assumptions are fairly weak, and are satisfied in Krugman's model of labor market pooling, a heterogeneous-agent version of Pagano's asset market model, and Ellison, Fudenberg, and Möbius' model of competing auctions.

Date: 2003
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Working Paper: Knife-Edge or Plateau: When do Market Models Tip? (2003)
Working Paper: Knife-Edge or Plateau: When Do Market Models Tip? (2003)
Working Paper: Knife Edge of Plateau: When Do Market Models Tip? (2003)
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