Paper #184

Title:

A model of market-making

Author:

Nicolaas J. Vriend

Date:

October 1996

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.

Keywords:

Decentralized trade, market--making, communication, trading uncertainty, Leex

JEL codes:

C7, D8, L1, M3

Area of Research:

Finance and Accounting

Published in:

European Journal of Economic and Social Systems, 15, No. 3, 185-202, 2001

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