Intermediation in Networks

Abstract

This paper studies bargaining and exchange in a networked market with intermediation. Possibilities to trade are restricted through a network of existing relationships and traders bargain over the division of available gains from trade along different feasible routes. Using a stochastic model of bargaining, I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study efficiency and the relationship between network structure and payoffs. In equilibrium, trade is never unduly delayed but it may take place too early and in states where delay would be efficient. The inefficiency arises from a hold-up threat and the inability of bargaining parties credibly to commit to a split in a future period. The model also shows how with competing trade routes as trade frictions go to zero agents that are not essential to a trade opportunity receive a payoff of zero.

Bargaining and Delay in Trading Networks

“…Recently, Siedlarek (2012) has studied a stochastic model of bargaining and exchange with common discount factor and intermediation on an exogenously given network. There is one seller who holds the indivisible good and trade is only feasible if there exists one path in the network connecting the seller to the buyer.…”

“…In Siedlarek (2012) bargaining is multilateral instead of having a series of bilateral negotiations along the trade route. It is close as if in each period a coalition of agents is drawn and has to divide some surplus and if they do not reach an agreement, then a new coalition is drawn to bargain over the division of some surplus, and so forth until an agreement is reached.…”

Intermediation and Resale in Networks

“…Goyal and Vega-Redondo (2007) posit that inessential intermediaries like player 1 should make zero profits. Siedlarek (2015) finds support for this hypothesis in his multilateral bargaining model. However, the hypothesis is not borne out by my model.…”

“…Choi, Galeotti, and Goyal (2017) also prove the existence of efficient equilibria in a different network setting in which intermediaries post prices and trade takes place along the least expensive path. In another recent paper, Siedlarek (2015) proposes a model in which players along a randomly selected intermediation chain negotiate the division of gains from trade; the multilateral bargaining protocol assumes away hold-up problems and generates asymptotically efficient outcomes.…”

Middlemen and Contestation in Directed Networks

“…Middlemen are defined as so-called cut nodes in mathematical graph theory(Wilson 2010). The importance of these critical nodes as conduits of information flows in social networks has been recognised byBurt (1992Burt ( , 2004Burt ( , 2005 andBurt (2010) and in economic networks byKalai et al (1978),Rubinstein & Wolinsky (1987),Jackson & Wolinsky (1996),Gilles et al (2006) andSiedlarek (2015).…”