Price stabilization in networks - What is an appropriate model?

Abstract

We consider a simple network model for economic agents where each can buy commodities in the neighborhood. Their prices may be initially distinct in any node. However, by assuming some rules on new prices, we show that the distinct prices will converge to unique by iterating buy and sell operations. First, we present a protocol model in which each agent always bids an arbitrary price in the difference between his own price and the lowest price in the neighborhood, called max price difference. Next, we derive the condition that price stabilization occurs in our model. Furthermore, we consider game (auction) theoretic price determination by assuming that each agent's value is uniformly distributed over the max price difference. Finally, we perform a simulation experiment. Our model is suitable for investigating the effects of network topologies on price stabilization. © 2011 Springer-Verlag.