Market Equilibrium with Transaction Costs

Identical products being sold at different prices in different locations is a common phenomenon. Price differences might occur due to various reasons such as shipping costs, trade restrictions and price discrimination. To model such scenarios, we supplement the classical Fisher model of a market by introducing {\em transaction costs}. For every buyer $i$ and every good $j$, there is a transaction cost of $\cij$; if the price of good $j$ is $p_j$, then the cost to the buyer $i$ {\em per unit} of $j$ is $p_j + \cij$. This allows the same good to be sold at different (effective) prices to different buyers. We provide a combinatorial algorithm that computes $ε$-approximate equilibrium prices and allocations in $O\left(\frac{1}ε(n+\log{m})mn\log(B/ε)\right)$ operations - where $m$ is the number goods, $n$ is the number of buyers and $B$ is the sum of the budgets of all the buyers.

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