A new paper was published by Tamás Sebestyén and Balázs Szabó in Netnomics, a journal published by Kluwer Academic Publisher. The article examines exogenous supplier-consumer networks in monopolistic competition and the relationship between the structure of these networks and price dispersion. The results show that a slight deviation from the complete network results in heterogeneous prices, although this heterogeneity becomes economically significant only under sparse or small networks.
Abstract
This paper investigates the extent to which the structure of the interaction network between suppliers and buyers affects equilibrium price heterogeneity. An incomplete interaction structure leads to uneven information flows and different information bases for consumers which is then taken into account by price setting producers. This results in heterogenous prices even if producers are identical in all other respects. The complete interaction network serves as a special case resembling standard monopolistic competition models. We show that a slight deviation from the complete network results in heterogeneous prices, although this heterogeneity becomes economically significant only under sparse or small networks. Sparsity as the main determinant of price heterogeneity dominates network asymmetry: relatively dense networks show minimal price dispersion even if its degree distribution follows a power law.