Small business and the self-organization of a marketplace
In many developing countries such as China, the typical marketplace is a cluster of small shops or booths. We investigate an economic model in which circular causality, including search and matching between buyers and sellers, forms agglomeration forces. We find that an authoritative third party that reduces search costs is important in sustaining a large marketplace. However, it is unnecessary to reduce search costs to zero. Finally, the low capital requirement of setting up a firm helps to sustain a large marketplace owing to its increased product heterogeneity.
JEL ClassificationD04 R12
Zhu acknowledges the financial support from the National Natural Science Foundation of China (Grants-in-Aid for Science Research 71373235 and 71503232). An earlier version of this paper was entitled “Search, matching, and self-organization of a marketplace” (Discussion paper no. 396, Institute of Developing Economies-JETRO, 2013, Japan).
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