Networks, Frictions, and Price Dispersion

47 Pages Posted: 2 Oct 2015 Last revised: 6 Oct 2020

See all articles by Javier D. Donna

Javier D. Donna

University of Florida

Pablo Schenone

Arizona State University (ASU)

Greg Veramendi

Arizona State University (ASU) - Economics Department

Date Written: September 24, 2020

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.

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 (September 24, 2020). Available at SSRN: https://ssrn.com/abstract=2667585 or http://dx.doi.org/10.2139/ssrn.2667585

Javier D. Donna (Contact Author)

University of Florida ( email )

Gainesville, FL 32606
United States

HOME PAGE: http://www.jdonna.org/

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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