On the Role of a Market Maker in Networked Cournot Competition

Abstract

We study Cournot competition among firms in a networked marketplace that is centrally managed by a market maker. In particular, we study a situation in which a market maker facilitates trade between geographically separate markets via a constrained transport network. Our focus is on understanding the consequences of the design of the market maker and providing tools for optimal design. To that end, we provide a characterization of the equilibrium outcomes of the game between the firms and the market maker. Our results highlight that the equilibrium structure is impacted dramatically by the market maker's objective—depending on the objective, there may be a unique equilibrium, multiple equilibria, or no equilibria. Furthermore, the game may be a potential game (as in the case of classical Cournot competition) or not. Beyond characterizing the equilibria of the game, we provide an approach for designing the market maker to optimize a design objective (e.g., social welfare) at the equilibrium of the game. Additionally, we use our results to explore the value of transport (trade) and the efficiency of the market maker (compared with a single aggregate market).

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