Self-organization of decentralized markets with network externality

Abstract

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.