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/lp/american-economic-association/inefficiencies-in-networked-markets-QzGJfhy0yF
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- Publisher
- American Economic Association
- Copyright
- Copyright © 2015 by the American Economic Association
- Subject
- Articles
- ISSN
- 1945-7685
- eISSN
- 1945-7685
- DOI
- 10.1257/mic.20130098
- Publisher site
- See Article on Publisher Site
Abstract
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 )
Journal
American Economic Journal: Microeconomics – American Economic Association
Published: Nov 1, 2015