Kotowski, Maciej, and C. Matthew Leister. "Trading Networks and Equilibrium Intermediation." HKS Faculty Research Working Paper Series RWP18-001, January 2018 (Updated August 2018).

Abstract

We study an economy where intermediaries facilitate exchange between a supplier and consumers. The set of feasible transactions is characterized by a network and an efficient auction protocol sets prices. We examine trading networks compatible with a free-entry equilibrium. There is under-entry of intermediary traders in equilibrium due to complementarities among upstream and downstream traders. When intermediaries are speculators, who derive no private value from the tradable good, equilibrium networks exhibit an asymmetric structure with few intermediaries linking to the supplier. Generally, free-entry and competition may fail to purge redundant intermediaries from the market.