nep-net New Economics Papers
on Network Economics
Issue of 2005‒04‒16
nineteen papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Price Competition and Product Differentiation when Goods have Network Effects By Klaus CONRAD
  2. The Economics of Small Worlds By Matthew O. Jackson; Brian W. Rogers
  3. Search in the Formation of Large Networks: How Random are Socially Generated Networks? By Matthew O. Jackson; Brian W. Rogers
  4. Social Networks and Their Impact on the Employment and Earnings of Mexican Immigrants By Catalina Amuedo-Dorantes; Kusum Mundra
  5. Coalitional Manipulation on Networks By Biung-Ghi Ju
  6. Global Production Networks, Innovation, and Work: Why Chip and System Design in the IT Industry are Moving to Asia By Dieter Ernst; Boy Luethje
  7. Searching for a New Role in East Asian Regionlization: Japanese Production Networks in the Electronics Industry By Dieter Ernst
  8. On the Measurement of Segregation By Federico Echenique; Roland G. Fryer, Jr.
  9. E-Finance Development in Korea By Choong Yong Ahn; Doo Yong Yang
  10. Koyaanisqatsi in Cyberspace By Paul A. David
  11. TOWARDS INSTITUTIONAL INFRASTRUCTURES FOR E-SCIENCE: The Scope of the Challenge By Paul A David; Michael Spence
  12. The Beginnings and Prospective Ending of “End-to-End”: An Evolutionary Perspective On the Internet’s Architecture By Paul A. David
  13. E-commerce, two-sided markets and info-mediation By Alexandre Gaudeul; Bruno Jullien
  14. Effective Virtual Teams through Communities of Practice By Chris Kimble; Alexis Barlow; Feng Li
  15. Long–term Business Relationships between Consignor and Trucking Carrier in Japan By Norihiro KASUGA; Akio Torii
  16. Towards a cyberinfrastructure for enhanced scientific By Paul A. David
  17. The Economics of Scientific Research Coalitions: Collaborative Network Formation in the Presence of Multiple Funding Agencies By Paul A. David; Louise C. Keely
  18. Analysis and measurement of interactions in European Innovation By Jon Mikel Zabala Iturriagagoitia
  19. Pathways to Innovation in the Global Network Economy: Asian Upgrading Strategies in the Electronics Industry By Dieter Ernst

  1. By: Klaus CONRAD (University of Mannheim Department of Economics)
    Abstract: The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be either one with the firm offering the conventional engine as the only producer, one with the firm offering the new technology as the only producer, or one in which both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important. In order to find out whether private decision on the type of engine coincides with a socially optimal product differentiation, we determine the position of the two types of engine by a welfare maximizing authority.
    Keywords: Price competition; Quality competition; Environmental awareness; Network effects; Automobiles.
    JEL: L Q H L
    Date: 2005–02–07
  2. By: Matthew O. Jackson (Caltech); Brian W. Rogers (Caltech)
    Abstract: We examine a simple economic model of network formation where agents benefit from indirect relationships. We show that small-world features - -- short path lengths between nodes together with highly clustered link structures --- necessarily emerge for a wide set of parameters.
    Keywords: networks, small worlds
    JEL: A14 C72
    Date: 2005–03–14
  3. By: Matthew O. Jackson (Caltech); Brian W. Rogers (Caltech)
    Abstract: We present a model of network formation where entering nodes find other nodes to link to both completely at random and through search of the neighborhoods of these randomly met nodes. We show that this model exhibits the full spectrum of features that have been found to characterize large socially generated networks. Moreover, we derive the distribution of degree (number of links) across nodes, and show that while the upper tail of the distribution is approximately ``scale- free,'' the lower tail may exhibit substantial curvature, just as in observed networks. We then fit the model to data from six networks. Besides offering a close fit of these diverse networks, the model allows us to impute the relative importance of search versus random attachment in link formation. We find that the fitted ratio of random meetings to search-based meetings varies dramatically across these applications. Finally, we show that as this random/search ratio varies, the resulting degree distributions can be completely ordered in the sense of second order stochastic dominance. This allows us to infer how the relative randomness in the formation process affects average utility in the network.
    Keywords: Networks, Network Formation, Power Laws, Scale-Free Networks, Small Worlds, Search
    JEL: A14 C71 C72
    Date: 2005–03–14
  4. By: Catalina Amuedo-Dorantes (San diego State University); Kusum Mundra (San Diego State University)
    Abstract: We examine the impact of different types of social networks on the employment and wages of unauthorized and legal Mexican immigrants using data from the Mexican Migration Project. We find that social networks, particularly strong ties, contribute to the economic assimilation of immigrants by raising their hourly wages. However, networks do not enhance immigrants’ employability. Instead, strong ties allow for a lower employment likelihood possibly through the shelter against temporary unemployment provided by close family members. Finally, social networks do not alter the relative employment and earnings performance of unauthorized and legal immigrants in the absence of networks.
    JEL: J
    Date: 2005–02–09
  5. By: Biung-Ghi Ju (Department of Economics, The University of Kansas)
    Abstract: We consider an abstract model of division problems where each agent is identi- fied by a characteristic vector. Agents are situated on a network (a non-directed graph) and any connected coalition can reallocate members¡¯ characteristics (e.g. reallocation of claims in bankruptcy problems). A reallocation-proof rule prevents any coalition from benefiting, in terms of its total award, through a reallocation. We offer a full characterization of reallocation-proof rules without any assumption on the network structure. This result yields a variety of useful corollaries for specific networks such as the complete network, trees, networks without a ¡°bridge¡± etc. Our model has various special examples such as bankruptcy, surplus sharing, cost sharing, income redistribution, social choice with transferable utility, etc.
    Keywords: Division problem; Coalitional manipulation; Network; Graph; Reallocationproofness
    JEL: C71 D30 D63 D71
    Date: 2004–08
  6. By: Dieter Ernst (Economics Study Area, East-West Center); Boy Luethje (Institut fuer Sozialforschung, Universitaet Frankfurt, Germany)
    Abstract: This paper was prepared as an issue paper, to be discussed at the Planning Meeting of the SSRC on "Emerging Pathways to Innovation in Asia," September 12-13, 2003.
    Date: 2003–11
  7. By: Dieter Ernst (Economics Study Area, East-West Center)
    Abstract: This paper will be published in Peter and J. Katzenstein and Takashi Shiraishi, eds. Remaking East Asia: Beyond Americanization and Japanization, Cornell University Press.
    Date: 2004–03
  8. By: Federico Echenique; Roland G. Fryer, Jr.
    Abstract: This paper develops a measure of segregation based on two premises: (1) a measure of segregation should disaggregate to the level of individuals, and (2) an individual is more segregated the more segregated are the agents with whom she interacts. Developing three desirable axioms that any segregation measure should satisfy, we prove that one and only one segregation index satisfies our three axioms, and the two aims mentioned above; which we coin the Spectral Segregation Index. We apply the index to two well-studied social phenomena: residential and school segregation. We calculate the extent of residential segregation across major US cities using data from the 2000 US Census. The correlation between the Spectral index and the commonly-used dissimilarity index is .42. Using detailed data on friendship networks, available in the National Longitudinal Study of Adolescent Health, we calculate the prevalence of within-school racial segregation. The results suggests that the percent of minority students within a school, commonly used as a substitute for a measure of in-school segregation, is a poor proxy for social interactions.
    JEL: Z13 C0
    Date: 2005–04
  9. By: Choong Yong Ahn (Korea Institute of International Economic Policy); Doo Yong Yang (Korea Institute of International Economic Policy)
    Abstract: E-finance in Korea has evolved since the late 1980s, when developments in information and telecommunication technology started to be applied to the financial industry. Since the 1990s, e-finance has led a paradigm shift in the financial industry as financial transactions in computer-based tools began increasing. There are several factors that contributed to e-finance development. Korea possess the basic requisite conditions to foster thriving e-finance, including an advanced IT infrastructure, several government e-commerce initiatives and financial restructuring resulting from the financial crisis. In fact, all of these factors have eliminated possible impediments to the development of e-finance in developing countries. This paper shows that the decision for the introduction of internet banking depends on the profit level for the bank rather than the asset size and/or operation costs. Intuitively, large banks are early takers in providing Internet banking de to a huge amount of initial investment costs to establish an Internet banking network. At the same time, cost inefficient banks are inclined to consider the introduction of Internet banking earlier to reduce inefficiency caused by replacing cost-inefficient infrastructure. However, Korea shows an interesting case such that the asset size and operation costs were irrelevant to the establishment of Internet banking networks. On the other hand, profitability was relevant to the introduction of Internet banking. This may imply that relatively profitable banks at the onset of the crisis were able to jump into e-finance earlier than non-profitable banks. Furthermore, this paper shows that the adoption of internet banking has a positive effect of bank profit.
    Keywords: e-fianance development in Korea, Internet Banking, financial industry
    JEL: G21 L86 C33
    Date: 2004–04
  10. By: Paul A. David (Stanford University & The University of Oxford)
    Abstract: Koyaanisqatsi is a Hopi Indian word that translates into English as 'life out of balance,' 'crazy life,' 'life in turmoil,' 'life disintegrating,' all meanings consistent with indicating 'a way of life which calls for another way of living.” While not wishing to suggest either that the international regime of intellectual property rights protection scientific and technical data and information is “crazy” or that it is “in turmoil”, this paper argues that the persisting drift of institutional change towards towards a stronger, more extensive and globally harmonized system of intellectual property protections during the past two decades has dangerously altered the balance between private rights and the public domain in data and information. In this regard we have embarked upon “a way of life which calls for another way of living.” High access charges imposed by holders of monopoly rights in intellectual property have overall consequences for the conduct of science that are particularly damaging to programs of exploratory research which are recognized to be critical for the sustained growth of knowledge-driven economies. Lack of restraint in privatizing the public domain in data and information has effects similar to those of non- cooperative behaviors among researchers in regard to the sharing of access to raw data-steams and information, or the systematic under- provision the documentation and annotation required to create reliably accurate and up-to-date public database resources. Both can significantly degrade the effectiveness of the research system as a whole. The urgency of working towards a restoration of proper balance between private property rights and the public domain in data and information arises from considerations beyond the need to protect the public knowledge commons upon which the vitality of open science depends. Policy-makers who seek to configure the institutional infrastructure to better accommodate emerging commercial opportunities of the information-intensive “new economy” – in the developed and developing countries alike –therefore have a common interest in reducing the impediments to the future commercial exploitation of peer-to-peer networking technologies which are likely to be posed by ever-more stringent enforcement of intellectual property rights.
    JEL: O P
    Date: 2005–02–10
  11. By: Paul A David (University of Oxford & Stanford University); Michael Spence (University of Oxford & St Catherine’s College)
    Abstract: The three-fold purpose of this Report to the Joint Information Systems Committee (JISC) of the Research Councils (UK) is to: • articulate the nature and significance of the non-technological issues that will bear on the practical effectiveness of the hardware and software infrastructures that are being created to enable collaborations in e- Science; • characterise succinctly the fundamental sources of the organisational and institutional challenges that need to be addressed in regard to defining terms, rights and responsibilities of the collaborating parties, and to illustrate these by reference to the limited experience gained to date in regard to intellectual property, liability, privacy, and security and competition policy issues affecting scientific research organisations; and • propose approaches for arriving at institutional mechanisms whose establishment would generate workable, specific arrangements facilitating collaboration in e-Science; and, that also might serve to meet similar needs in other spheres such as e- Learning, e-Government, e-Commerce, e-Healthcare. In carrying out these tasks, the report examines developments in enhanced computer-mediated telecommunication networks and digital information technologies, and recent advances in technologies of collaboration. It considers the economic and legal aspects of scientific collaboration, with attention to interactions between formal contracting and 'private ordering' arrangements that rest upon research community norms. It offers definitions of e-Science, virtual laboratories, collaboratories, and develops a taxonomy of collaborative e-Science activities which is implemented to classify British e-Science pilot projects and contrast these with US collaboratory projects funded during the 1990s. The approach to facilitating inter-organizational participation in collaborative projects rests upon the development of a modular structure of contractual clauses that permit flexibility and experience-based learning.
    JEL: A
    Date: 2005–02–10
  12. By: Paul A. David (All Souls College, Oxford & Stanford University)
    Abstract: The technology of “the Internet” is not static. Although its “end-to- end” architecture has made this “connection-less” communications system readily “extensible,” and highly encouraging to innovation both in hardware and software applications, there are strong pressures for engineering changes. Some of these are wanted to support novel transport services (e.g. voice telephony, real-time video); others would address drawbacks that appeared with opening of the Internet to public and commercial traffic - e.g., the difficulties of blocking delivery of offensive content, suppressing malicious actions (e.g. “denial of service” attacks), pricing bandwidth usage to reduce congestion. The expected gains from making “improvements” in the core of the network should be weighed against the loss of the social and economic benefits that derive from the “end-to-end” architectural design. Even where technological “fixes” can be placed at the networks’ edges, the option remains to search for alternative, institutional mechanisms of governing conduct in cyberspace.
    JEL: L
    Date: 2005–02–10
  13. By: Alexandre Gaudeul (University of East Anglia - Norwich and ESRC-CCP); Bruno Jullien (IDEI - GREMAQ - University of Toulouse)
    Abstract: Participants in a market, buyers and sellers, may need the service of an intermediary who will put them into contact and give them information about their potential trading partner. The intermediary chooses what price it will charge to each side to have access to its service. It also chooses what information it will reveal, for example to the buyer about the value of the seller’s product. In a market with network externalities, it would be optimal that everybody had access to the other side, as each side wants as many agents from the other side to be present as possible. This is however not feasible as the intermediary must charge positive access prices if it is to make any profit. In a market with asymmetric information, it would be optimal that all information about the buyers’ and sellers’ valuation for the traded product be available, but the intermediary will want to conceal or manipulate that information to increase its profit. The paper examines in the first part how network externalities play out in the intermediary’s access pricing strategies in both a monopoly and a competitive setting. In the second part, the paper shows how the intermediary will strategically manipulate and conceal information to extract the surplus from trade in the market it intermediates.
    Keywords: Intermediation, internet, asymmetric information, information goods, network effects, two sided markets, matching.
    JEL: D4 L1
    Date: 2005–03–31
  14. By: Chris Kimble (University of York UK - Department of Computer Science); Alexis Barlow (Glasgow Caledonian University - Caledonian Business School); Feng Li (Strathclyde Business School - Department of Management Science)
    Abstract: This paper examines the nature of virtual teams and their place in the networked economy. It presents a framework for categorising virtual teams and argues that fundamental changes have taken place in the business environment which force people and organisations to operate in 'two spaces' simultaneously: the physical space and the electronic space. It highlights some of the issues of trust and identity that exist in virtual teams and argues that, due to certain barriers, only a small proportion of these teams reach a satisfactory level of performance. Using the evidence from two recent sets of studies, it highlights some of the barriers to effective virtual team working and demonstrates the critical importance of trust and social bonding to the functioning of such teams. It reports on the use of a 'Community of Practice' in a virtual team and argues that this may provide one mechanism for overcoming some of the barriers. Finally, it argues that many of the problems stem from a lack of understanding of the new geography of the information economy and that, rather than accepting the notion that 'geography no longer matters', continued efforts must be made to understand the relationship between the physical world in which we live and the electronic world of virtual team working.
    Keywords: Virtual Teams, Communities of Practice, Globalisation, Teleworking, Electronic Space, Physical Space
    JEL: J24 O31
    Date: 2005–04–07
  15. By: Norihiro KASUGA (Nagasaki University); Akio Torii (Yokohama National University)
    Abstract: In this paper, we have empirically analyzed the factors that lead to longer business relationships in the logistics industry. The main conclusions of this paper are summarized as follows. First, the terms of relationships observed between the consignors and the trucking carriers that receive consignment of the transportation of the consignor’s main products have significantly positive associations with the level of information exchanged and consignments of distribution processing operations proposed by the consignee. Transaction cost economics implies that long-term relationships facilitate investment in relation-specific assets so as to improve efficiency. Then, we have sound reason to assume that the content of the shared information and the equipment for distribution processing have a significantly relation-specific nature, and accumulation of the related human capital, such as skill in workers and know-how, is important to improve efficiency of the whole logistics system. At the same time, these assets may function as hostages to maintain the long-term relationships. In regard to all of these points, the same mechanism is at work as in the commercial distribution market. The second conclusion is that the long-term business relationship is affected by the demand volatility of the consignor’s product. Consignors who belong to industries with a large volatility of demand tend to rely on transportation services procured from spot logistics markets with a shorter contract term. This finding is also consistent with previous research in the commercial distribution market. These results suggest that the mechanism to minimize transaction costs by establishing long- term business relationships is likely to exist in the logistics market. This is the same mechanism which is pointed out in the commercial distribution market. Generally, assets consisting of a system with a network structure tend to be sunken. Therefore, in order to save coordination costs which are incurred to make the whole distribution market function efficiently, long-term business relationships are indispensable. Thus, relationships between companies in the logistics market are likely to be affected by the shortening of the delivery time in the commercial distribution market.
    Keywords: transaction cost, logistics, Japanese system, long-term relationship
    JEL: L
    Date: 2005–04–08
  16. By: Paul A. David (Stanford University & The Oxford Internet Institute)
    Abstract: A new generation of information and communication infrastructures, including advanced Internet computing and Grid technologies, promises to enable more direct and shared access to more widely distributed computing resources than was previously possible. Scientific and technological collaboration, consequently, is more and more coming to be seen as critically dependent upon effective access to, and sharing of digital research data, and of the information tools that facilitate data being structured for efficient storage, search, retrieval, display and higher level analysis. A recent (February 2003) report to the U.S. NSF Directorate of Computer and Information System Engineering urged that funding be provided for a major enhancement of computer and network technologies, thereby creating a cyberinfrastructure whose facilities would support and transform the conduct of scientific and engineering research. The articulation of this programmatic vision reflects a widely shared expectation that solving the technical engineering problems associated with the advanced hardware and software systems of the cyberinfrastructure will yield revolutionary payoffs by empowering individual researchers and increasing the scale, scope and flexibility of collective research enterprises. The argument of this paper, however, is that engineering breakthroughs alone will not be enough to achieve such an outcome; success in realizing the cyberinfrastructure’s potential, if it is achieved, will more likely to be the resultant of a nexus of interrelated social, legal and technical transformations. The socio-institutional elements of a new infrastructure supporting collaboration – that is to say, its supposedly “softer” parts -- are every bit as complicated as the hardware and computer software, and, indeed, may prove much harder to devise and implement. The roots of this latter class of challenges facing “e-Science” will be seen to lie in the micro- and meso-level incentive structures created by the existing legal and administrative regimes. Although a number of these same conditions and circumstances appear to be equally significant obstacles to commercial provision of Grid services in interorganizational contexts, the domain of publicly supported scientific collaboration is held to be the more hospitable environment in which to experiment with a variety of new approaches to solving these problems. The paper concludes by proposing several “solution modalities,” including some that also could be made applicable for fields of information-intensive collaboration in business and finance that must regularly transcends organizational boundaries.
    JEL: K
    Date: 2005–02–09
  17. By: Paul A. David (Stanford University); Louise C. Keely (University of Wisconsin)
    Abstract: The paper develops a formal model of coalition-building (“network” formation) among research units that seek competitive funding from a supra-regional program, while also drawing support from their respective regional funding agencies. This approach enables one to ask whether there are stable (equilibrium) outcomes in the interactions among the several funding entities, and to investigate what those outcomes would imply for the evolving distribution of scientific performance within the entire region and its national sub-regions. This analysis is motivated by the absence of frameworks of analysis applicable to problems of design of public R&D funding arrangements in the European Union, and in other regional systems were independent programs of “federal and state” support for research co-exists First, a model is developed to analyze how collaborations are formed under different sets of funding rules of an international funding institution, starting with a fixed finite population of research units and an associated distribution of reputed quality, or scientific reputation.. Collaborations are formed in the expectation of attracting supra-national funding, following a specific ordering procedure; this gives rise to a repeated non-cooperative game of coalition (or collaboration) formation with the distribution of payoffs within the collaboration following to a fixed rule. Non- cooperative games of coalition formation developed by Bloch (1995), and Ray and Vohra (1999), provides a useful framework single-period framework. Following Keely (1999), this type of game is applied to a multi-period setting in which a distribution of coalitions is tracked, along with the levels of funding received. The latter are determined according to a rule comparing the distribution of reputations within and across collaborations. Alternative possible external funding rules are analyzed to determine how they impact upon collaboration formation, and the resulting evolution of the reputation distribution (as that will be affected by the allocation of funding). In the second part of the analysis, various combinations of national and supra-national funding regimes are examined, but all the rules considered stipulate that collaborations are funded as a whole, regardless of the number of members; and that their funding is determined by the absolute level of average reputation, or of the variance in reputation, rather than just the rankings of the proposed networks. The Nash equilibria associated with each of the stipulated funding regimes can be compared, and to characterize the outcomes, the paper examines these two moments of the endogenously determined distributions research “competence” (signaled by the reputation measures) within the entire ensemble of research units and its national partitions. A numerical simulation helps illustrate the nature of the conclusions for policy design that can be drawn from this style of analysis.
    JEL: D6 D7 H
    Date: 2005–02–10
  18. By: Jon Mikel Zabala Iturriagagoitia (Institute of Innovation & Knowledge Management. INGENIO, CSIC-UPV)
    Abstract: Innovation Systems constitute an analysis framework, which allows comprehending the socio-economic structure of a territory. It consists of analyzing the existence of actors such as government institutions, clusters, universities, industries… their main competences, and the interactions into Innovation Networks among them. Thus, authorities (regional, national, local…) are endowed of a tool that allows the creation and development of competitive and efficient Innovation Systems. In this context, and due to the importance of interactions inside Innovation Systems, the present research intends to contribute a methodology which helps us to analyze and measure these interactions produced within Innovation Networks. The methodology developed will be tested in a sector which is present in several European Territories. This way, not only the measures defined but also the differences among the Networks analyzed will be observed and tested.
    Keywords: Innovation Systems, Interactions, Innovation Networks, Measures.
    JEL: R
    Date: 2005–03–11
  19. By: Dieter Ernst (Economics Study Area, East-West Center)
    Abstract: This working paper was prepared for the Workshop on 'Transnational High-tech Strategies in a Global World," Institute of Advanced Social and Management Studies, Lancaster, University, United Kingdom, June 2003.
    Date: 2004–06

This nep-net issue is ©2005 by Yi-Nung Yang. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.