DP18073 Price Setting on a Network
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.