Models of Bilateral Trade in Networks

This chapter reviews the research on bilateral trade in markets with a network structure. The survey focuses on the following questions: how do local prices depend on global network architecture? When does the law of one price hold? How do competitive forces in different segments of the market influence the bargaining power of each position in the network? Is trade efficient? How does the network evolve as traders reach agreements and exit the market? If forming links is costly for the traders, what networks will emerge? How does the underlying market mechanism affect payoffs and allocations?