Bilateral and Community Enforcement in a Networked Market with Simple Strategies

Brown University Economics Working Paper

44 Pages Posted: 18 Jan 2011 Last revised: 28 Jan 2011

See all articles by Itay P Fainmesser

Itay P Fainmesser

Johns Hopkins University - Carey Business School

David Goldberg

affiliation not provided to SSRN

Date Written: January 5, 2011

Abstract

We present a model of repeated games in large buyer-seller networks in the presence of reputation networks via which buyers share information about past transactions. The model allows us to characterize cooperation networks - networks in which each seller cooperates (by providing high quality goods) with every buyer that is connected to her. To this end, we provide conditions under which: [1] the incentives of a seller s to cooperate depend only on her beliefs with respect to her local neighborhood - a subnetwork that includes seller s and is of a size that is independent of the size of the entire network; and [2] the incentives of a seller s to cooperate can be calculated as if the network was a random tree with seller s at its root. Our characterization sheds light on the welfare costs of relying only on repeated interactions for sustaining cooperation, and on how to mitigate such costs.

Keywords: Networks, Moral Hazard, Graph Theory, Repeated Games

Suggested Citation

Fainmesser, Itay Perah and Goldberg, David, Bilateral and Community Enforcement in a Networked Market with Simple Strategies (January 5, 2011). Brown University Economics Working Paper, Available at SSRN: https://ssrn.com/abstract=1742960 or http://dx.doi.org/10.2139/ssrn.1742960

Itay Perah Fainmesser (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://https://sites.google.com/site/itaypfainmesser/home

David Goldberg

affiliation not provided to SSRN ( email )

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