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Knife-Edge or Plateau: When do Market Models Tip?

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  • Glenn Ellison
  • Drew Fudenberg

Abstract

This paper studies whether agents must agglomerate at a single location in a class of models of two-sided interaction. In these models there is an increasing returns effect that favors agglomeration, but also a crowding or market-impact effect that makes agents prefer to be in a market with fewer agents of their own type. We show that such models do not tip in the way the term is commonly used. Instead, they have a broad plateau of equilibria with two active markets, and tipping occurs only when one market is below a critical size threshold. Our assumptions are fairly weak, and are satisfied in Krugman's model of labor market pooling, a heterogeneous-agent version of Pagano's asset market model, and Ellison, Fudenberg, and Möbius' model of competing auctions.
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Suggested Citation

  • Glenn Ellison & Drew Fudenberg, 2003. "Knife-Edge or Plateau: When do Market Models Tip?," Levine's Working Paper Archive 506439000000000098, David K. Levine.
    • Handle: RePEc:cla:levarc:506439000000000098
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    References listed on IDEAS

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    1. Henderson, J V, 1974. "The Sizes and Types of Cities," American Economic Review, American Economic Association, vol. 64(4), pages 640-656, September.
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    5. Glenn Ellison & Drew Fudenberg & Markus Möbius, 2004. "Competing Auctions," Journal of the European Economic Association, MIT Press, vol. 2(1), pages 30-66, March.
    6. Marco Pagano, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 255-274.
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    More about this item

    JEL classification:

    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • G1 - Financial Economics - - General Financial Markets

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