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Networks, frictions, and price dispersion

Author

Listed:
  • Donna, Javier D.
  • Schenone, Pablo
  • Veramendi, Gregory F.

Abstract

This article uses networks to study price dispersion in seller-buyer markets where buyers with unit demand interact with multiple, but not all, sellers;and buyers and sellers compete on prices after they meet. The central finding of this article is that price dispersion is determined by the structure of the network. First, for any given network we characterize the pairwise stable matchings and the prices that support them. Second, we characterize the set of all graphs where price dispersion is precluded. Third, we use a theorem from Frieze (1985) to show that the graphs where price dispersion is precluded arise asymptotically with probability one in random Poisson networks, even as the probability of each individual link goes to zero. Finally, we calibrate our model to the documented price dispersion at the online trading platform eBay and show how counterfactual network structures at eBay would substantially decrease price dispersion. (c) 2020 The Authors. Published by Elsevier Inc.

Suggested Citation

  • Donna, Javier D. & Schenone, Pablo & Veramendi, Gregory F., 2020. "Networks, frictions, and price dispersion," Munich Reprints in Economics 84735, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:84735
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    Cited by:

    1. Polanski Arnold & Vega-Redondo Fernando, 2018. "Bargaining Frictions in Trading Networks," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 18(1), pages 1-11, January.
    2. Donna, Javier & Schenone, Pablo & Veramendi, Gregory, 2016. "Frictions in internet auctions with many traders: A counterexample," Economics Letters, Elsevier, vol. 138(C), pages 81-84.
    3. Chan, Keith Jin Deng, 2025. "Inefficiency in a frictionless market," Games and Economic Behavior, Elsevier, vol. 151(C), pages 59-69.
    4. Talamàs, Eduard, 2019. "Price dispersion in stationary networked markets," Games and Economic Behavior, Elsevier, vol. 115(C), pages 247-264.
    5. Joachim Kaldasch, 2023. "The Price Distribution of Consumer Goods in Retail Markets," International Journal of Economics and Financial Issues, Econjournals, vol. 13(5), pages 52-58, September.

    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L00 - Industrial Organization - - General - - - General

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