Voluntary Self-Sustaining Reciprocity

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See all articles by Ivo Welch

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: October 14, 2019

Abstract

In our model, buyers prefer local over lower-cost vendors even in the ab- sence of direct preferences, taxes, subsidies, contracts, sanctions, information asymmetries, audits, etc. Instead, they prefer locals because they internalize the fact that local agents will in turn be more likely to buy from them in the future. Local sellers understand that buyers’ preferences give them limited local market power, and therefore raise their prices and earn surplus in equilibrium. Our model can explain how voluntary reciprocity among subsets of identical agents can sustain itself, and how ex-ante identical goods from ex-ante identical sellers can acquire and maintain sustainably differentiated prices. Reciprocity can be a natural entry barrier even in an industry with zero entry costs.

Keywords: Networks, Altruism, Reciprocity, Entry Barriers

JEL Classification: D70, L1, C7

Suggested Citation

Welch, Ivo, Voluntary Self-Sustaining Reciprocity (October 14, 2019). Available at SSRN: https://ssrn.com/abstract=

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

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Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

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