Incompleteness and Inefficiency in Trading Networks

Abstract

This paper analyzes incompleteness in automobile dealer trade networks. Inter dealer trade data from Adamson Motors, a medium sized dealer in Rochester Minnesota, shows a fractured and incomplete dealer trade network. Further, large trade volumes are generated by relatively few trade partners. A homogenous linking network of retail automobile sales is developed. A symmetric pairwise stable equilibrium is shown to always exist. A link represents a relationship, which lubricates trade between dealers by allowing them to trade whenever one dealer is in need. Asymmetric information about buyer search/inconvenience costs allows the dealer to increase profits by limiting the number of trade partners. This reduction in the number of links raises the local buyers cost of obtaining models not currently in stock and allows the dealer to sell models with higher profit margins. These are the models in stock, that don't incur transportation costs with sale. This effect diminishes as the number of trading relationships declines. After a certain threshold, raising the cost of obtaining distant models results in an overwhelming level of lost sales to distant dealers of the same make and local dealers of alternative makes. Network incompleteness is shown to be inefficient. In the absence of asymmetric information about buyer search costs, the complete network is the unique pairwise stable and efficient network.