Itay Fainmesser, Business Economics PhD
Dissertation Chair: Prof. Al Roth
Community Structure and Market Outcomes
Consider a large market with asymmetric information, in which sellers choose whether to cooperate or deviate and 'cheat' their buyers, and buyers decide whether to re-purchase from different sellers. We model active trade relationships as links in a buyer-seller network and suggest a framework for studying repeated games in such networks. In our framework, buyers and sellers have rich yet incomplete knowledge of the network structure. The introduction of incomplete information allows us to derive meaningful conditions that determine whether a network is a Steady State Cooperation Network (SSCN) - a network that is consistent with trade and trust between every buyer and seller that are connected.
For a network to be a SSCN, links in the network need to have high enough future values. We show that the entire network structure can be summarized by a simple expression that captures these future values and that three network features increase the values of links: sparsity, moderate competition, and segregation. Moreover, networks that maximize trade in the absence of cooperation constraints are generally not SSCNs. Constrained trade maximizing networks are in between 'old world' segregated and sparse networks, and a 'global market'. Institutions such as reputation networks, litigation, and third-party evaluation services expand the set of SSCNs and restore efficiency. Our results offer a stylized interpretation of the evidence on trade networks within markets and of the documented effect of institutions on the network structure in such markets.
