Donna, Javier and Schenone, Pablo and Veramendi, Gregory (2017): Networks, Frictions, and Price Dispersion.
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Abstract
This paper uses networks to study price dispersion in sellerbuyer 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 (3545 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.
Item Type:  MPRA Paper 

Original Title:  Networks, Frictions, and Price Dispersion 
English Title:  Networks, Frictions, and Price Dispersion 
Language:  English 
Keywords:  Price Dispersion; Frictions; Networks 
Subjects:  J  Labor and Demographic Economics > J3  Wages, Compensation, and Labor Costs > J31  Wage Level and Structure ; Wage Differentials J  Labor and Demographic Economics > J6  Mobility, Unemployment, Vacancies, and Immigrant Workers > J64  Unemployment: Models, Duration, Incidence, and Job Search L  Industrial Organization > L1  Market Structure, Firm Strategy, and Market Performance > L11  Production, Pricing, and Market Structure ; Size Distribution of Firms 
Item ID:  77150 
Depositing User:  Professor Javier Donna 
Date Deposited:  27 Feb 2017 09:41 
Last Modified:  10 Oct 2019 13:19 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/77150 
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Networks, Frictions, and Price Dispersion. (deposited 02 Oct 2015 10:29)

Networks, Frictions, and Price Dispersion. (deposited 16 Nov 2015 14:39)
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Networks, Frictions, and Price Dispersion. (deposited 16 Nov 2015 14:39)