Networks, Frictions, and Price Dispersion

61 Pages Posted: 2 Oct 2015 Last revised: 1 Mar 2017

See all articles by Javier Donna

Javier Donna

Ohio State University (OSU) - Economics

Pablo Schenone

Arizona State University (ASU)

Greg Veramendi

Arizona State University (ASU) - Economics Department

Date Written: February 24, 2017

Abstract

This paper 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. Our approach allows for ex post indirect competition, where a buyer who is not directly linked with a seller affects the price obtained by that seller. Indirect competition generates the central finding of our paper: price dispersion depends on both the number of links in the network, and how these links are distributed. Networks with very few links can have no price dispersion, while networks with many links can still support significant price dispersion. We present three main theoretical results. 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. We also provide quantitative results on the finite sample properties of price dispersion in random networks. Finally, we present an application to eBay to show that: (i) a calibration of our model reproduces the price dispersion documented in eBay quite well, and (ii) the amount of price dispersion in eBay would decrease substantially (35-45 percent as measured by the coefficient of variation) in a counterfactual analysis, where we change eBay’s network structure so that links are drawn with equal probability for all sellers and buyers.

Keywords: Price Dispersion; Frictions; Networks

JEL Classification: L11; J31; J64

Suggested Citation

Donna, Javier D. and Schenone, Pablo and Veramendi, Greg, Networks, Frictions, and Price Dispersion (February 24, 2017). Available at SSRN: https://ssrn.com/abstract=2667585 or http://dx.doi.org/10.2139/ssrn.2667585

Javier D. Donna (Contact Author)

Ohio State University (OSU) - Economics ( email )

410 Arps Hall
1945 N. High St.
Columbus, OH 43210-1172
United States

Pablo Schenone

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Greg Veramendi

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

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