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Random Search in the Presence of Markets

Author

Listed:
  • Meenakshi Rajeev

    (City University of Hong Kong)

  • Dipankar Dasgupta

Abstract

This paper examines in a dynamic game-theoretic framework framework, the role of social institution of money and markets in facilitating exchange. It reveals how, depending on the level of transaction costs associated with a market setup (synonymously, trading posts) appropriate monetary trade emerges, which like a hub and spoke network (Starr and Stinchcombe, 1999) makes some markets non-functioning. However, despite the obvious advantages of a market setup in reducing search costs, pure random search for a complementary trading partner prevails in many economies, especially, in many developing economies. This paper models this feature of developing economies by introducing differences in transaction costs across agents and shows why sustainable equilibria might exist exhibiting random search for certain commodities even in the presence of established markets.

Suggested Citation

  • Meenakshi Rajeev & Dipankar Dasgupta, 2007. "Random Search in the Presence of Markets," Microeconomics Working Papers 22897, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:microe:22897
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    File URL: http://www.eaber.org/node/22897
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    Cited by:

    1. Rajeev, Meenakshi, 2012. "Search cost, trading strategies and optimal market structure," Economic Modelling, Elsevier, vol. 29(5), pages 1757-1765.

    More about this item

    Keywords

    Trading post; marketless trade; steady state Nash equilbrium;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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