Bilateral Trading in Networks

Abstract

In many markets, ranging from markets for agricultural goods in developing countries to financial markets, goods flow via a sequence of intermediated trade before reaching final customers, information is asymmetric, and trading opportunities are incomplete. We study a dynamic model of bargaining in networks with asymmetric information that captures these three features. We show that the equilibrium price dynamic is non-monotonic and that traders who intermediate the object arise endoge- nously and attain a profit. This profit depends on their network location. Inefficiencies may arise in equilibrium, but as the time horizon goes to infinity and traders become perfectly patients, equilibrium becomes ex-post efficient.

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