Price Competition In Two-Sided Networks

Abstract

Many economic interactions occur in settings where sellers are only able to sell to a subset of buyers for due to geographic or informational limitations or due to deliberate network design on the part of a platform. To examine these interactions, this paper builds a model of sellers with differentiated products competing on price for overlapping buyers linked to them via a network. If there is sufficiently small substitutability between goods, there is a unique interior pure-strategy equilibrium where each seller's price is decreasing in a form of Bonacich centrality. We outline the necessary conditions under which, for example, the introduction of a new buyer or seller entry causes a reduction in equilibrium price. We show that a network where buyers observe and trade with all sellers with probability one maximises consumer surplus, but such a network does not necessarily maximise the platform's profit. Rather, the profit-maximising network is one in which there is an equal probability of each buyer observing each seller, but that probability is less than one if the network is sufficiently large or goods are sufficiently substitutable.