Formation of buyer‐seller trade networks in a quality‐differentiated product market

Abstract

Abstract We examine the formation of buyer‐seller links when exchange can take place only if such a link exists. Sellers produce products of different qualities, and multiple sellers can form a sellers' association to pool their customers setting uniform prices. Buyers form trade links with individual sellers or sellers' associations. We show which buyer‐seller links will form and find the set of links that are stable and show how these links influence prices. We also show that a trade network mismatch may occur where a high‐quality good remains unsold even without an economy‐wide excess supply of goods.