Social structure and reputation: the NASDAQ case study

In 1996, two investigations conducted by the Securities and Exchange Commission and the American Department of Justice reported non-competitive practices among market makers on the NASDAQ. These reports also mentioned the influence of the NASDAQ social structure on market makers' behaviours. Most market makers adopted social norms in order to increase significantly their income at the expense of the customers. This paper aims to explain the rise and long-term effects of non-competitive practices, through the integration of a concrete view of "embeddedness" (Granovetter, 1985). We propose the use of game theory tools to achieve this goal. A rereading of Kreps' model of reputation sheds light on its structural dimension and illustrates the way social structure governs individual behaviours.