Self-Organization of Decentralized Markets with Network Externality
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In this paper an agent-based model is developed to simulate the evolution of a decentralized market with network externality. The traders in the market who are characterized by their willingness prices adjust their ask or bid prices to maximize their own individual surplus subject to the social effect of cumulative transaction. The decentralized market eventually exhibits not one single equilibrium but a stable state with obvious price dispersion. It is found that self-organization of the decentralized market is path dependent and locked in local rather than global maximum. Network externality will enhance or mitigate the expansion of the transaction driven by self-optimization of both sellers and buyers, thus having significant impacts on the final trading volume and market efficiency at stable states.
KeywordsTrading Volume Artificial Agent Network Externality Market Maker Total Surplus
We thank Dr. Jianzhong Zhang for his helpful comments and language improvements. This research was supported by National Natural Science Foundation of China under Grant of No. 61174165 and Program for New Century Excellent Talents in University (NCET-10-0245). This work was also the result of Interdisciplinary Salon of Beijing Normal University.