Quantity Competition in Networked Markets Outflow and Inflow Competition

Abstract

This paper investigates how quantity competition operates in economies in which a network describes the set of feasible trades. A general equilibrium model is presented in which prices and .ows of goods are endogenously determined. In such economies equilibrium dictates whether an individual buys, sells or does both (which is possible). The first part of the analysis provides sufficient conditions for pure strategy equilibrium existence; characterizes equilibrium prices, flows and markups; and details negative effects on welfare of changes in the network structure. The main contributions show that goods do not cycle, since prices strictly increase along the supply chains; that not all connected players with different marginal rates of substitution trade; and that adding trading relationships may decrease individual and social welfare. The second part of the analysis provides necessary and sufficient conditions for a networked economy to become competitive as the number of players grows large. In this context it shown that no economy in which goods are resold can ever be competitive; and that large well connected economies are competitive.