Imperfect Price Competition in Networks

Abstract

Network structures play a fundamental role in the modern economy. Examples vary from communication and transportation networks to supply chains and intermediation activities. Despite the economic relevance of these markets, the theoretical literature lacks an adequate framework to study price competition in these complex environments. In this paper we develop a model of imperfect price competition in networks. Our approach maps traditional concepts of market demand, market power and double marginalization into networks. We make three main contributions. First, we show the existence and uniqueness of an equilibrium price for a general class of networks. Second, we develop several comparative statics results which highlight the role of the network topology. Finally, we show that, contrary to traditional wisdom, vertical integration in networked markets may lead to a reduction in social welfare and outcomes that are not Pareto superior.