nep-net New Economics Papers
on Network Economics
Issue of 2006‒01‒01
four papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Network competition and merchant discount fees By Fumiko Hayashi
  2. Collaborative Networks in Experimental Triopolies By Anthony Ziegelmeyer; Katinka Pantz
  3. Denominational Schism: An Economic Perspective By Mehmet Karacuka; Martin Leroch
  4. A complex network approach to urban growth By Claes Andersson; Koen Frenken; Alexander Hellervik

  1. By: Fumiko Hayashi
    Abstract: Pricing in two-sided markets has not been fully understood yet. Especially, investigations of how competition in these markets affects the price structure or levels are still underway. This paper takes the payment card industry as an example of two-sided markets and examines whether two networks’ competition lowers one of the prices in the industry, merchant discount fees, and if it does, how much it lowers equilibrium merchant fees compared with the fee set by a monopoly network. If some cardholders hold only one card and the other cardholders hold two different cards, whether network competition lowers the fees and by how much the fees will be lowered depends on various factors, such as the share of multihoming cardholders in the total cardholder base, the merchants’ transactional benefit, each network’s net transactional benefit to its card users, the difference in the two networks’ cardholder bases, and the share of cardholders in the total customer base. Numerical examples with various parameter values suggest that typically, if the share of multihoming cardholders is 20 percent or less, networks can act as if they are monopolies; and if the share is around 50 percent, the average equilibrium merchant fee is reduced from the monopolistic merchant fee by 25 percent.
    Date: 2005
  2. By: Anthony Ziegelmeyer; Katinka Pantz
    Abstract: This paper experimentally investigates the interdependence between market competition and endogenously emerging inter-firm collaboration. We restrict attention to arrangements resulting from bilateral collaboration agreements that typically characterize real world applications in which the activity concerned is a core activity of the partnering firms and risk sharing, contract enforcement and protection of proprietory knowledge are central issues. We rely on a baseline model by Goyal and Joshi (2003) which formalizes the strategic formation of collaborative networks between firms that are competing on the same product market. This model predicts strategically stable patterns of inter-firm collaboration which are empirically observed but have been ruled out in the previous theoretical literature. In a two-stage game, firms decide to form bilateral collaboration links, whose formation is costly but reduces marginal production costs, before they compete in quantity on the market. We report the results of a series of experiments. The first experiment is designed as a straightforward theory-test simulating a one-shot interaction. We manipulate the cost of link formation in different treatments. Our data almost perfectly match the predictions for both stages whenever the link formation costs are extreme and the predicted networks symmetric (empty or complete networks). In the case of intermediate link formation costs where the predicted networks are asymmetric, subjects rarely form asymmetric networks. When they do, observed and predicted quantities are less in accordance than for symmetric networks. Collusion cannot account for the observed behavior. In our second experiment we reject the conjecture that these findings are driven out by experience in a setting in which we increase the implemented number of repetitions of the two-stage game. Finally, in our third experiment we reduce the complexity of the setting by transforming the original two-stage game into a one-stage game where the formation of inter-firm networks directly determines firms’ payoffs. These are derived from assumed equilibrium market outputs on the here absent competition stage. In this case, observed networks coincide with the predicted ones indicating that experimental subjects’ limited capacity to foresee the outcomes of the market stage may be driving the earlier discrepancies.
    Keywords: Endogenous formation of networks; Cournot competition; Collusion; Experiments
    JEL: D85 C92 D43
    Date: 2005–11
  3. By: Mehmet Karacuka (Ege University); Martin Leroch (University of Hamburg)
    Abstract: In this paper we present an economic model contributing to the explanation of religious schism, a topic mostly dealt with in the fields of sociology and psychology so far. The main idea is to see religious groups as networks. These networks may serve as a device for exchanging information about and via other members. Two effects are implied by this view. On the one hand, the more members a network has, the more anonymous it gets, meaning that the signals one can receive about the type of some other are getting worse. On the other hand, the larger a network is, the more potentially valuable information is available. A modernizing economy is characterized by an increasing number of transactions with an increasing number of partners, leading to increasing transaction costs. It might be profitable for groups to split up in this economic environment in order to economize on these transaction costs. In our view, our findings also contribute to the explanation of the so-called Kelley Thesis, stating that religious movements with stricter enforcement of their behavioural norms are growing in size, while such with rather liberal attitudes toward their norm enforcement face a loss of members. Historical and empirical results supporting our line of argument are presented.
    Keywords: Religion, Schism, Social Norms, Social Capital, Social Networks
    JEL: O17
    Date: 2005–12–20
  4. By: Claes Andersson; Koen Frenken; Alexander Hellervik
    Abstract: The economic geography can be viewed as a large and growing network of interacting activities. This fundamental network structure and the large size of such systems makes complex networks an attractive model for its analysis. In this paper we propose the use of complex networks for geographical modeling and demonstrate how such an application can be combined with a cellular model to produce output that is consistent with large scale regularities such as power laws and fractality. Complex networks can provide a stringent framework for growth dynamic modeling where concepts from e.g. spatial interaction models and multiplicative growth models can be combined with the flexible representation of land and behavior found in cellular automata and agent-based models. In addition, there exists a large body of theory for the analysis of complex networks that have direct applications for urban geographic problems. The intended use of such models is twofold: i) to address the problem of how the empirically observed hierarchical structure of settlements can be explained as a stationary property of a stochastic evolutionary process rather than as equilibrium points in a dynamics, and, ii) to improve the prediction quality of applied urban modeling.
    Keywords: evolutionary economics, complex networks, urban growth
    Date: 2005–02

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