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Communication networks in markets

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  • Edoardo Gallo

Abstract

This paper proposes a dynamic model of bargaining to analyze decentralized markets where buyers and sellers obtain information about past deals through their social network. There is a unique equilibrium outcome which depends crucially on the peripheral (least connected) individuals in each group. The main testable predictions are that groups with high density and/or low variability in the number of connections across individuals allow their members to obtain a better deal. These predictions are tested in a lab experiment through 4 treatments that vary the network that groups of 6 subjects are assigned to. The results of the experiment lend support to the theoretical predictions: subjects converge to a high equilibrium demand if they are assigned to a network that is dense and/or has low variability in number of connections across members. An extension explores an alternative set-up in which buyers and sellers belong to the same social network: if the network is regular and the agents are homogeneous then the unique equilibrium division is 50-50

Suggested Citation

  • Edoardo Gallo, 2014. "Communication networks in markets," Cambridge Working Papers in Economics 1431, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1431
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    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1431.pdf
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    References listed on IDEAS

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    Cited by:

    1. H Peyton Young, 2014. "The Evolution of Social Norms," Economics Series Working Papers 726, University of Oxford, Department of Economics.
    2. Calvin Cochran & Cailin O’Connor, 2019. "Inequality and inequity in the emergence of conventions," Politics, Philosophy & Economics, , vol. 18(3), pages 264-281, August.
    3. Edoardo Gallo & Chang Yan, 2015. "Effciency and equilibrium in network games: An experiment," Cambridge Working Papers in Economics 1546, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    network; communication; experiment; noncooperative bargaining; 50-50 division;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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