Buyer-Seller Relationships Under Perfect Information

This study explores the formation of buyer-seller relationships in markets with observable quality. We develop a framework that provides an intuitive basis for the formation of relationships within such markets. A key feature of our framework is that as individuals gain experience in the marketplace, they resolve uncertainty over unobserved bargainer types. Relationships thus form as a means to reduce such transactions costs and uncertainty. We explore the usefulness of our model using a battery of simulations and experimental treatments. Overall, we find that our conjectures are largely confirmed. Most importantly, market structure critically influences the quantitative impact of relationships on overall market efficiency. In certain important cases, a greater number of buyer-seller relationships can reduce market efficiency