American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Inefficiencies in Networked Markets
American Economic Journal: Microeconomics
vol. 7,
no. 4, November 2015
(pp. 43–82)
Abstract
In many markets, relationship specific investments are necessary for trade. These formed relationships constitute a networked market in which not all buyers can trade with all sellers. We show that networked markets can be decomposed to identify how alternative trading opportunities affect who trades with whom and at what price. This uncovers agents' incentives to invest in relationships. Investment inefficiencies can eliminate all the gains from trade, but for reasons that differ depending on how investments are made. Three applications are considered in detail: high-skill labor markets, merger markets when industries are consolidating, and the international market for natural gas. (JEL C78, D85, D86)Citation
Elliott, Matthew. 2015. "Inefficiencies in Networked Markets." American Economic Journal: Microeconomics, 7 (4): 43–82. DOI: 10.1257/mic.20130098Additional Materials
JEL Classification
- C78 Bargaining Theory; Matching Theory
- D85 Network Formation and Analysis: Theory
- D86 Economics of Contract: Theory
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