The effect of link costs on simple buyer-seller networks

We examine experimentally how link costs affect the formation of links between a single seller and two potential buyers as well as the ensuing bargaining. Theory predicts that link costs lead to less competitive networks, with one link rather than two links, and that link costs do not affect the bargaining outcomes conditional on the network. We find support for the first but not the second prediction. 2-link networks form less frequently when there are link costs. Given that a 2-link network forms, however, a seller on average offers a smaller share of the pie to the buyers in the presence than in the absence of link costs. This impact of link costs can be explained by a disutility for (advantageous) inequality on the part of the seller.

Highlights
► We find that link costs lead to less competitive networks, as predicted. ► Network formation is determined by the short side of the market, which is not as predicted. ► We find that link costs affect bargaining outcomes (in competitive networks), which is not as predicted. ► The unpredicted results are in line with players having a preference for equality.