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A model of market-making
Vriend, Nicolaas J.
Universitat Pompeu Fabra. Departament d'Economia i Empresa
The two essential features of a decentralized economy taken intoaccount are, first, that individual agents need some informationabout other agents in order to meet potential trading partners,which requires some communication or interaction between theseagents, and second, that in general agents will face tradinguncertainty. We consider trade in a homogeneous commodity. Firmsdecide upon their effective supplies, and may create their ownmarkets by sending information signals communicating theirwillingness to sell. Meeting of potential trading partners isarranged in the form of shopping by consumers. The questions to beconsidered are: How do firms compete in such markets? And what arethe properties of an equilibrium? We establish existenceconditions for a symmetric Nash equilibrium in the firms'strategies, and analyze its characteristics. The developedframework appears to lend itself well to study many typicalphenomena of decentralized economies, such as the emergence ofcentral markets, the role of middlemen, and price-making.
2005-09-15
Finance and Accounting
decentralized trade
market--making
communication
trading uncertainty
leex
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