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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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    3. 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.
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    7. 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.
    8. 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.
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    13. Drazen, Allan, 1980. "Recent Developments in Macroeconomic Disequilibrium Theory," Econometrica, Econometric Society, vol. 48(2), pages 283-306, March.
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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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