Knife-edge or plateau
Subtitle: when doe market models tip?
By: Glenn Ellison [and] Drew Fudenberg
Contributors: Massachusetts Institute of Technology. Dept. of Economics; Fudenberg, Drew
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 03-07; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 03-07.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2003
Place of publication: Cambridge, MA
Language: eng
Number of pages: 30
Description: This paper studies whether agents must agglomerate at a single location in a class of models of two-sided interaction. In these models there is an increasing returns effect that favors agglomeration, but also a crowding or market-impact effect that makes agents prefer to be in a market with fewer agents of their own type. We show that such models do not tip in the way the term is commonly used. Instead, they have a broad plateau of equilibria with two active markets, and tipping occurs only when one market is below a critical size threshold. Our assumptions are fairly weak, and are satisfied in Krugman's [1991b] model of labor market pooling, a heterogeneous-agent version of Pagano's [1989] asset market model, and Ellison, Fudenberg and Mb̲ius's [2002] model of competing auctions. Keywords: Tipping, Agglomeration, Two-sided Markets, Network Externalities, Increasing Returns. JEL Classification: R1, G2, C7.
Notes: "February 2003."; "First draft: July 10, 2002. This draft: February 5, 2003"--Abstract.

Includes bibliographical references (p. 29-30).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.