Trading networks with price-setting agents

• Published in: Games and economic behavior Vol. 67; no. 1; pp. 36 - 50
• Main Authors: Blume, Lawrence E., Easley, David, Kleinberg, Jon, Tardos, Éva
• Format: Journal Article
• Language: English
• Published: Duluth Elsevier Inc 01.09.2009; Elsevier; Academic Press
• Series: Games and Economic Behavior
• Subjects: Allocative efficiency; Economic models; Game theory; Graph theory; Nash equilibrium; Networks; Networks Trade Price formation; Price formation; Prices; Strategic behaviour; Studies; Trade; Traders; Networks; Trade; Price formation; L14; C72
• ISSN: 0899-8256; 1090-2473
• DOI: 10.1016/j.geb.2008.12.002

In a wide range of markets, individual buyers and sellers trade through intermediaries, who determine prices via strategic considerations. Typically, not all buyers and sellers have access to the same intermediaries, and they trade at correspondingly different prices that reflect their relative amounts of power in the market. We model this phenomenon using a game in which buyers, sellers, and traders engage in trade on a graph that represents the access each buyer and seller has to the traders. We show that the resulting game always has a subgame perfect Nash equilibrium, and that all equilibria lead to an efficient allocation of goods. Finally, we analyze trader profits in terms of the graph structure — roughly, a trader can command a positive profit if and only if it has an “essential” connection in the network, thus providing a graph-theoretic basis for quantifying the amount of competition among traders.