Trading Networks with Bilateral Contracts

37 Pages Posted: 22 Jun 2014 Last revised: 27 May 2018

See all articles by Tamás Fleiner

Tamás Fleiner

Budapest University of Technology and Economics

Zsuzsanna Janko

Eötvös Loránd University

Akihisa Tamura

Keio University

Alexander Teytelboym

University of Oxford - Department of Economics; University of Oxford - Institute for New Economic Thinking at the Oxford Martin School

Date Written: May 22, 2018

Abstract

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

Fleiner, Tamás and Janko, Zsuzsanna and Tamura, Akihisa and Teytelboym, Alexander, Trading Networks with Bilateral Contracts (May 22, 2018). Available at SSRN: https://ssrn.com/abstract=2457092 or http://dx.doi.org/10.2139/ssrn.2457092

Tamás Fleiner

Budapest University of Technology and Economics ( email )

Budafoki ut 8.
Budapest, 1111
Hungary

Zsuzsanna Janko

Eötvös Loránd University ( email )

Pazmany Peter setany 1A
Budapest, -- H1117
Hungary

Akihisa Tamura

Keio University ( email )

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

Alexander Teytelboym (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

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