Networks, Frictions, and Price Dispersion
Pablo Schenone and
Gregory Veramendi ()
Additional contact information
Pablo Schenone: Arizona State University
No 331, 2017 Meeting Papers from Society for Economic Dynamics
This paper studies price dispersion in buyer-seller markets using networks to model frictions, where buyers are linked with a subset of sellers and sellers are linked with a subset of buyers. Our approach allows for 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 the structure of the network (how 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 develop a decomposition of the network that characterizes which links are redundant (i.e. have no effect on prices). We show that a particular network structure (Hamiltonian Cycle) with only two links per node has no price dispersion. We then use a theorem from Frieze (1985) to show that this network structure arises asymptotically with probability one in a randomly drawn network, even as the probability of an individual link goes to zero. We also show the finite sample properties of this relationship and find that even small sparse networks can have very little price dispersion. In an application to eBay, we show that our model reproduces the price dispersion seen in the data quite well, and that 35-45 percent of the price dispersion at eBay can be explained by the network structure alone.
New Economics Papers: this item is included in nep-com, nep-gth, nep-hme, nep-net and nep-ure
References: View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Journal Article: Networks, frictions, and price dispersion (2020)
Working Paper: Networks, Frictions, and Price Dispersion (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:331
Access Statistics for this paper
More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().