Trading Networks and Equilibrium Intermediation

We consider a network of intermediaries facilitating exchange between buyers and a seller. Intermediary traders face a private trading cost, a network characterizes the set of feasible transactions, and an auction mechanism sets prices. We examine stable and equilibrium networks. Stable networks, which are robust to agents’ collusive actions, exist when cost uncertainty is acute and multiple, independent trading relationships are valuable. A free-entry process governs the formation of equilibrium networks. Such networks feature too few intermediaries relative to the optimal market organization and they exhibit an asymmetric structure amplifying the shocks experienced by key intermediaries. Welfare and empirical implications of stable and equilibrium networks are investigated.