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Volume 15, Number 3, 2001
Evolution and Learning in Markets
Page(s) 185 - 202
DOI: 10.1051/ejess:2001104

European Journal of Economic and Social Systems 15 N°3 (2001) 185-202

A Model of Market-making

Nicolaas J. Vriend

Queen Mary, University of London, Dept. of Economics, Mile End Road, London, E1 4NS, UK.

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.

Key words: Decentralized Trade, Market-making, Communication, Networks, Trading Uncertainty

© EDP Sciences 2001