Tsutomu Nakano, Douglas White

Paper #: 06-05-015

We analyze general price equilibrium mechanisms of production-chain markets, comparing the producer market model proposed by Harrison White with hypothesized network effects on pricing that emerge from empirical analysis of trade relationships among over 8,000 firms in a large-scale industrial district in Tokyo. Consistent with White’s model, the supplier-prime buyer relationships are strictly hierarchical and constitute a directed acyclic graph (DAG). There are no exchange cycles that would promote price equilibrium. We argue, partly from a Simmelian approach to triad configurations, that three linked network configurations are likely to affect pricing. First, a particular form of structural cohesion as defined by multi-connectivity (bicomplete connectedness within a large bicomponent) is a critical “seeding” mechanism where quasi-optimal exchange can be achieved as the “visible hand” in production-chain markets. Second, a powerful core of elite firms was detected that organizes status differences among firms and serves to institutionalize role structures in the production markets. Third, structural advantages in pricing accrue to elite core firms because suppliers upstream in the hierarchy operate through a 4:1 preponderance of multiple-supplier to multiple-buyer triads, which enforces competition among themselves rather than among the buyers. These pricing benefits to buyers are passed along to the downstream elite firms. The elites can exert power over the complex network through the serial divisions of labor embedded in the tiers of subcontracting hierarchies, dominating price-setting from the top.