Intermediation in Networks

This paper studies bargaining and exchange with intermediation in a network setting. Possibilities to trade are restricted through a network of existing relationships and traders bargain over the division of available gains from trade along feasible routes. Using a stochastic model of bargaining, I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study the relationship between network structure and payoffs. The model shows how with competing trade routes agents that are not essential to a trade opportunity receive a payoff of zero as trade frictions go to zero.