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Inefficiencies in Networked Markets

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  • Matthew Elliott

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)

Suggested Citation

  • Matthew Elliott, 2015. "Inefficiencies in Networked Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 43-82, November.
    • Handle: RePEc:aea:aejmic:v:7:y:2015:i:4:p:43-82
    Note: DOI: 10.1257/mic.20130098
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    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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