Toomas Hinnosaar (Collegio Carlo Alberto)

“Price Setting on a Network”

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 under a few technical assumptions, there is a unique equilibrium in a price-setting game on a network. The key distortion in the price-setting is multiple-marginalization, which is magnified by strategic influences. The firms are more influential when they have larger and more connected subnetworks. The bigger influence allows the firms to charge higher markups and earn higher profits. The results emphasize the importance of considering the network structure of influences in regulatory policies.