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A model of market-making

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  • Nicolaas J. Vriend

Abstract

The two essential features of a decentralized economy taken into account are, first, that individual agents need some information about other agents in order to meet potential trading partners, which requires some communication or interaction between these agents, and second, that in general agents will face trading uncertainty. We consider trade in a homogeneous commodity. Firms decide upon their effective supplies, and may create their own markets by sending information signals communicating their willingness to sell. Meeting of potential trading partners is arranged in the form of shopping by consumers. The questions to be considered are: How do firms compete in such markets? And what are the properties of an equilibrium? We establish existence conditions for a symmetric Nash equilibrium in the firms' strategies, and analyze its characteristics. The developed framework appears to lend itself well to study many typical phenomena of decentralized economies, such as the emergence of central markets, the role of middlemen, and price-making.

Suggested Citation

  • Nicolaas J. Vriend, 1996. "A model of market-making," Economics Working Papers 184, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:184
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    File URL: https://econ-papers.upf.edu/papers/184.pdf
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    References listed on IDEAS

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    1. Gould, John P, 1980. "The Economics of Markets: A Simple Model of the Market-making Process," The Journal of Business, University of Chicago Press, vol. 53(3), pages 167-187, July.
    2. Stigler, George J., 2011. "Economics of Information," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 35-49.
    3. John G. Riley & Richard Zeckhauser, 1980. "Optimal Selling Strategies:," UCLA Economics Working Papers 180, UCLA Department of Economics.
    4. Judd, Kenneth L., 1997. "Computational economics and economic theory: Substitutes or complements?," Journal of Economic Dynamics and Control, Elsevier, vol. 21(6), pages 907-942, June.
    5. John Riley & Richard Zeckhauser, 1983. "Optimal Selling Strategies: When to Haggle, When to Hold Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(2), pages 267-289.
    6. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    7. Martin Shubik, 1975. "The General Equilibrium Model Is Incomplete And Not Adequate For The Reconciliation Of Micro And Macroeconomic Theory," Kyklos, Wiley Blackwell, vol. 28(3), pages 545-573, August.
    8. Green, Jerry, 1980. "On the Theory of Effective Demand," Economic Journal, Royal Economic Society, vol. 90(358), pages 341-353, June.
    9. Foley, Duncan K, 1975. "On Two Specifications of Asset Equilibrium in Macroeconomic Models," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 303-324, April.
    10. Blin, Jean-Marie, 1980. "Comments on "The Economics of Markets: A Simple Model of the Market-making Process."," The Journal of Business, University of Chicago Press, vol. 53(3), pages 193-197, July.
    11. Drazen, Allan, 1980. "Recent Developments in Macroeconomic Disequilibrium Theory," Econometrica, Econometric Society, vol. 48(2), pages 283-306, March.
    12. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
    13. repec:bla:kyklos:v:28:y:1975:i:3:p:545-73 is not listed on IDEAS
    14. GARY-BOBO, R. & LESNE, J.-Ph., 1988. "Advertising strategies and competition in a Chamberlinian market model," LIDAM Discussion Papers CORE 1988026, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    15. Ionnides, Yannis M, 1990. "Trading Uncertainty and Market Form," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 619-638, August.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Rosemarie Nagel & Nicolaas J. Vriend, 1999. "An experimental study of adaptive behavior in an oligopolistic market game," Journal of Evolutionary Economics, Springer, vol. 9(1), pages 27-65.
    2. Kutschinski, Erich & Uthmann, Thomas & Polani, Daniel, 2003. "Learning competitive pricing strategies by multi-agent reinforcement learning," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2207-2218, September.
    3. Tomas Klos, 1999. "Governance and Matching," Computing in Economics and Finance 1999 341, Society for Computational Economics.
    4. Kutschinski, Erich & Uthmann, Thomas & Polani, Daniel, 2003. "Learning competitive pricing strategies by multi-agent reinforcement learning," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 2207-2218.
    5. repec:dgr:rugsom:99b41 is not listed on IDEAS

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    More about this item

    Keywords

    Decentralized trade; market--making; communication; trading uncertainty; Leex;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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