Personalized trading networks

2.55 Actual market relations frequently differ from idealized markets in that each established buyer and seller frequently develops groups of suppliers or customers with whom they are more inclined to deal with than anyone else. Through experience, each market participant locates specific parties with whom they have confidence in and with whom personalized, repetitive trading relationships develop under the aegis of unwritten, informal understandings. Such repetitive trading helps to reduce information costs and, with the development of norms and the build up of trust, reduces bargaining, monitoring, and enforcement costs (Wilson (1980)). In examining the 'bazaar economy' Geertz (1978) noted the importance of 'clientization' (e.g. the pairing of buyers and sellers in recurrent transactions), in reducing information costs in an uncertain trading environment. Richardson (1964) notes a similar process whereby buyers and sellers who are loyal to one another may obtain favorable attention or services, such as priority in times of product scarcity.

2.56 In environments in which formal (e.g. legal) procedures for monitoring and enforcing agreements are absent or inadequate, the generation of trust and the build-up of relationships based on reciprocity are likely to be crucial factors in the development of trade: they serve as a proxy for laws (Posner (1980)). Trust can allow transactors to build flexibility into their trading relationships since adjustments can be made sequentially with less risk of information distortions (Macauley (1963). The parties are aware that opportunistic behavior can undermine the basis of trust and therefore threaten the privileged trading status which each holds. Trust and reciprocity can enable trade to take place even in a very uncertain and unstable economic environment.