Stability and Competitive Equilibrium in Trading Networks

Stability and Competitive Equilibrium in Trading Networks

By
Michael Ostrovsky, John William Hatfield, Scott Duke Kominers, Alexandru Nichifor, Alexander Westkamp
Journal of Political Economy. October
2013, Vol. 121, Issue 5, Pages 966-1005

We introduce a model in which agents in a network can trade via bilateral contracts. We find that when continuous transfers are allowed and utilities are guasilinear, the full substitutability of preferences is sufficient to guarantee the existence of stable outcomes for any underlying network structure. Furthermore, the set of stable outcomes is essentially equivalent to the set of competitive equilibria, and all stable outcomes are in the core and are efficient. By contrast, for any domain of preferences strictly larger than that of full substitutability, the existence of stable outcomes and competitive equilibria cannot be guaranteed.