Networks, Frictions, and Price Dispersion

This paper studies price dispersion in buyer-seller markets using networks to model frictions, where buyers are linked with a subset of sellers and sellers are linked with a subset of buyers. Although there is a large search literature studying wage/price dispersion, search models typically restrict the type of competition that can occur between buyers (firms) and sellers (workers) when determining prices or wages. Our approach allows for indirect competition, where a buyer who is not directly linked with a seller affects the price obtained by that seller. Indirect competition generates the central finding of our paper: even when there are significant frictions, price distributions and allocations are close to the perfectly competitive outcome where the law of one price holds. We then investigate the role of indirect competition in a dynamic setting by studying wages in the context of an on-the-job search model. We find that indirect competition has similar effects on wage dispersion and wage dynamics. This leads to two novel pre- dictions relative to the search literature. Lowering frictions (so that workers receive job offers at a higher rate) leads to: (1) lower worker mobility and lower expected wage growth and (2) lower expected wages in markets with high unemployment. We argue that our framework is suited to the analysis of a wide range of real-world markets, such as the labor market and buyer-seller trading platforms like eBay or Amazon.