Networks, Frictions, and Price Dispersion

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