Matt Elliott - Inefficiencies in networked markets

In many markets relationship specific investments are necessary to enable trade. Typically there are multiple buyers, multiple sellers and heterogeneous gains from trade. In some markets a buyer and seller must make different and separate investments to trade, in others investments are jointly made and negotiated. These investments are subject to inefficiencies: under-investment, due to potential hold-up, and over-investment to generate ``outside options''. When investments are separate over-investment is limited. In contrast, inefficiency from under-investment cannot be bounded. This result reverses when investments are negotiated. In this setting there is no under-investment. However, inefficiency from over-investment cannot now be bounded. This analysis is made possible by an algorithm that decomposes any networked market to identify how buyers' and sellers' alternative possible trade partners affect their bargained outcomes.