Knife Edge of Plateau: When Do Market Models Tip?

32 Pages Posted: 6 Mar 2003 Last revised: 31 Oct 2010

See all articles by Drew Fudenberg

Drew Fudenberg

Massachusetts Institute of Technology (MIT)

Glenn Ellison

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2003

Abstract

This paper studies whether agents must agglomerate at a single location in a class of models of two-sided interaction. In these models there is an increasing returns effect that favors agglomeration, but also a crowding or market-impact effect that makes agents prefer to be in a market with fewer agents of their own type. We show that such models do not tip in the way the term is commonly used. Instead, they have a broad plateau of equilibria with two active markets, and tipping occurs only when one market is below a critical size threshold. Our assumptions are fairly weak, and are satisfied in Krugman's [1991b] model of labor market pooling, a heterogeneous-agent version of Pagano's [1989] asset market model, and Ellison, Fudenberg and Mobius's [2002] model of competing auctions.

Suggested Citation

Fudenberg, Drew and Ellison, Glenn David, Knife Edge of Plateau: When Do Market Models Tip? (March 2003). NBER Working Paper No. w9528. Available at SSRN: https://ssrn.com/abstract=385041

Drew Fudenberg

Massachusetts Institute of Technology (MIT) ( email )

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Glenn David Ellison (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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