Trading Networks with Bilateral Contracts
37 Pages Posted: 22 Jun 2014 Last revised: 27 May 2018
Date Written: May 22, 2018
We consider a model of matching in trading networks in which firms can enter into bilateral contracts. In trading networks, stable outcomes, which are immune to deviations of arbitrary sets of firms, may not exist. We define a new solution concept called trail stability. Trail-stable outcomes are immune to consecutive, pairwise deviations between linked firms. We show that any trading network with bilateral contracts has a trail-stable outcome whenever firms’ choice functions satisfy the full substitutability condition. For trail-stable outcomes, we prove results on the lattice structure, the rural hospitals theorem, strategy-proofness, and comparative statics of firm entry and exit. We also introduce weak trail stability which is implied by trail stability under full substitutability. We describe relationships between the solution concepts
Keywords: matching markets, market design, trading networks, supply chains, trail stability, weak trail stability, chain stability, stability, contracts.
JEL Classification: C78, D47, L14
Suggested Citation: Suggested Citation