Working Paper: CEPR ID: DP18073
Authors: Toomas Hinnosaar
Abstract: Most products are produced and sold by supply chain networks, where an interconnected network of producers and intermediaries set prices to maximize their profits. I show that there exists a unique equilibrium in a price-setting game on a network. The key distortion reducing both total profits and social welfare is multiple-marginalization, which is magnified by strategic interactions. Individual profits are proportional to influentiality, a new measure of network centrality defined by the equilibrium characterization. The results emphasize the importance of the network structure when considering policy questions such as mergers or trade policies.
Keywords: price setting; networks; sequential games; multiple marginalization; supply chains; mergers; trade; centrality
JEL Codes: C72; L14; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unique equilibrium (C62) | influenced by multiple marginalization (J15) |
| multiple marginalization (J15) | reduced total profits (D33) |
| multiple marginalization (J15) | reduced social welfare (I38) |
| number of firms increases (D21) | worsens marginalization problem (F63) |
| individual firms' pricing decisions (L11) | influence own profits (D33) |
| individual firms' pricing decisions (L11) | influence profits of connected firms (L14) |
| equilibrium price of final good (D41) | equates to total marginal cost (D24) |
| influentiality measure (C52) | captures how firms' pricing decisions affect each other (D43) |
| mergers/trade policies (L49) | alter efficiency of pricing outcomes (D61) |