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A Network Model of Price Dispersion

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  • Pasini, Giacomo
  • Pin, Paolo
  • Weidenholzer, Simon

Abstract

We analyze a model of price competition a la Bertrand in a network environment. Firms only have a limited information on the structure of network: they know the number of potential customers they can attract and the degree distribution of customers. This incomplete information framework stimulates the use of Bayesian-Nash equilibrium. We find that, if there are customers only linked to one firm, but not all of them are, then an equilibrium in randomized strategies fails to exist. Instead, we find a symmetric equilibrium in randomized strategies. Finally, we test our results on US gasoline data. We find empirical evidence consistent with firms playing random strategies.

Suggested Citation

  • Pasini, Giacomo & Pin, Paolo & Weidenholzer, Simon, 2008. "A Network Model of Price Dispersion," Coalition Theory Network Working Papers 6230, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemct:6230
    DOI: 10.22004/ag.econ.6230
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    1. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion In The Small And In The Large: Evidence From An Internet Price Comparison Site," Journal of Industrial Economics, Wiley Blackwell, vol. 52(4), pages 463-496, December.
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    Cited by:

    1. Aoyagi, Masaki, 2018. "Bertrand competition under network externalities," Journal of Economic Theory, Elsevier, vol. 178(C), pages 517-550.
    2. repec:hal:spmain:info:hdl:2441/jeo70lroq9p9bmeio80mpgg5h is not listed on IDEAS
    3. repec:spo:wpmain:info:hdl:2441/jeo70lroq9p9bmeio80mpgg5h is not listed on IDEAS

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    More about this item

    Keywords

    Demand and Price Analysis;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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