Trading in networks: theory and experiments

Abstract

We propose a model of posted prices in networks. The model maps traditional concepts of market power, competition and double marginalization into networks, allowing for the study of pricing in complex structures of intermediation such as supply chains, transportation networks and decentralized trading. Our theoretical analysis provides a complete characterization of equilibrium prices for arbitrary structures of intermediation. Our experiments complement our theoretical work and point to the key role of node criticality as an organizing principle for understanding pricing, efficiency and the division of surplus in networked markets.