Hierarchical Trade

20 Pages Posted: 22 Feb 2018

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Hans H. Haller

Virginia Polytechnic Institute & State University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2018

Abstract

Commodity trading is typically organized hierarchically: Large‐scale trade takes place at the global price system while individuals trade at local price systems within their countries. Agencies or trading houses establish the link between these different market places. In this paper, we devise a framework to study this type of hierarchical trade. We identify the free trade and the autarky equilibrium as polar cases. We show that no other two‐stage market equilibria exist if the commodity space is two‐dimensional. An example demonstrates that other, so‐called intermediate equilibria exist for three‐dimensional commodity spaces. We then provide an explicit construction of special classes of intermediate equilibria. Moreover, we study the consequences when some countries control the agency that organizes trade at the global level and we analyze the role of international goods arbitrage. Finally, we show that profit‐maximizing agencies may not promote free trade outcomes.

JEL Classification: D43, D50, F10

Suggested Citation

Gersbach, Hans and Haller, Hans H., Hierarchical Trade (April 2018). Economic Inquiry, Vol. 56, Issue 2, pp. 1165-1184, 2018, Available at SSRN: https://ssrn.com/abstract=3127885 or http://dx.doi.org/10.1111/ecin.12513

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Research ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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Hans H. Haller

Virginia Polytechnic Institute & State University - Department of Economics ( email )

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Blacksburg, VA 24061
United States
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