Community Structure and Market Outcomes: A Repeated Games in Networks Approach

Consider a large market with asymmetric information, in which sellers choose whether to cooperate or deviate and ?cheat?their buyers, and buyers decide whether to re-purchase from di¤erent sellers. We model active trade relationships as links in a buyer-seller network and suggest a framework for studying repeated games in such networks. In our framework, buyers and sellers have rich yet incomplete knowledge of the network structure; allowing us to derive meaningful conditions that determine whether a network is consistent with trade and cooperation between every buyer and seller that are connected. We show that three network features reduce the minimal discount factor necessary for sustaining cooperation: moderate competition, sparseness, and segregation. We ? nd that the incentive constraints rule out networks that maximize the volume of trade and that the constrained trade maximizing networks are in between ?old world? segregated and sparse networks, and a ?global market?