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on Network Economics |
| By: | Ana Babus (Erasmus Universiteit Rotterdam) |
| Abstract: | Modern banking systems are highly interconnected. Despite their various benefits, the linkages that exist between banks carry the risk of contagion. In this paper we investigate how banks decide on direct balance sheet linkages and the implications for contagion risk. In particular, we model a network formation process in the banking system. The trade-off between the gains and the risks of being connected shapes banks ’incentives to form links. We show that banks manage to form networks that are resilient to contagion. Thus, in an equilibrium network, the probability of contagion is virtually 0. |
| Keywords: | financial stability; network formation; contagion risk |
| JEL: | G21 D82 |
| Date: | 2006–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060093&r=net |
| By: | M. Keith Chen (Yale School of Management, Yale University); Barry J. Nalebuff (Yale School of Management, Yale University) |
| Abstract: | While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good. Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimally charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsoft's joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if all browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that a essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality. There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture B's surplus highlights the challenges facing a firm whose product depends on an essential good. |
| Keywords: | Bundling, Complements, Monopoly leverage, Net neutrality, Price discrimination, Tying, Versioning |
| JEL: | C7 D42 D43 K21 L11 L12 L13 L41 M21 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1588&r=net |
| By: | Pramila Krishnan; Emanuela Sciubba (School of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | This paper provides a theoretical framework of endogenous network formation that yields testable predictions for the network architectures generated by a particular informal institution common in village economies. We test the implications of the model on data from rural Ethiopia. In contrast to the current literature, we demonstrate the critical role of both number of links and architecture in determining the impact of social networks on outcomes. Social capital matters, but its impact differs by the architecture of the network to which one belongs. |
| Keywords: | Endogenous network formation, social networks, rural institutions. |
| JEL: | D85 Z13 O12 O17 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0614&r=net |
| By: | Topi Miettinen; Panu Poutvaara |
| Abstract: | We argue that anti-corruption laws may provide an efficiency rationale for why political parties should meddle in the distribution of non-ideological political nominations. Anti-corruption laws forbid trade in nominations made by politicians. However, citizens may pay for gaining access to politicians, thereby becoming potential candidates for nominations. Such rent-seeking results in excessive network formation. Political parties may reduce wasteful network formation, thanks to their ability to enter into exclusive membership contracts. This holds even though anti-corruption laws also bind political parties. |
| Keywords: | Political parties, Two-sided Platforms, Political Nominations, Rent-seeking, Network Formation |
| JEL: | D72 D85 L14 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2006-28&r=net |
| By: | Okamoto, Yusuke |
| Abstract: | For the selection of a firm's structure between vertical integration and arm's-length outsourcing, the importance of the thickness of the market had been emphasized in the previous literature. Here we take account of communication networks such as telephone, telex, fax, and the Internet. By doing so, we could illustrate the relationship between communication networks and the make-or-buy decision. With communication network technology differing in each type of firm, both vertically integrated firms and arm's-length outsourcing firms coexist, which was never indicated in the previous literature. However, when common network technology is introduced, such coexistence generically does not occur. |
| Keywords: | Buyer-supplier relationship, Communication networks, International　outsourcing, Vertical integration, Communication, Network, Industrial management, Telecommunication |
| JEL: | D23 D43 F23 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper54&r=net |
| By: | Robert P. Gilles; Sudipta Sarangi |
| Abstract: | We examine the process of building social relationships as a non-cooperative game that requires mutual consent and involves reaching out to others at a cost. Players create their social network from amongst their set of acquaintances. Having acquaintances allows players to form naive beliefs about the feasibility of building direct relationships with their acquaintances. These myopic beliefs describe how the other players are expected to respond to the initiation of a link by a player. We introduce a stability concept called "monadic stability" where agents play a best response to their formed myopic beliefs such that these beliefs are self-confirming. The resulting equilibrium networks form subset of the set of pairwise stable networks. |
| Keywords: | Social networks, network formation, pairwise stability, trust, self-confirming equilibrium |
| JEL: | C72 C79 D85 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp642&r=net |
| By: | Roediger-Schluga, Thomas (Department of Technology Policy, ARC Systems Research); Barber, Michael J. (Centro de Ciências Matemáticas, Universidade da Madeira) |
| Abstract: | Using a large and novel data source, we study the structure of R&D collaboration net-works in the first five EU Framework Programmes (FPs). The networks display proper-ties typical for complex networks, including scale-free degree distributions and the small-world property. Structural features are common across FPs, indicating similar network formation mechanisms despite changes in governance rules. Several findings point towards the existence of a stable core of interlinked actors since the early FPs with integration increasing over time. This core consists mainly of universities and research organisations. We observe assortative mixing by degree of projects, but not by degree of organisations. Unexpectedly, we find only weak association between central projects and project size, suggesting that different types of projects attract different groups of actors. In particular, large projects appear to have included few of the pivotal actors in the networks studied. Central projects only partially mirror funding priorities, indicating field-specific differences in network structures. The paper concludes with an agenda for future research. |
| Keywords: | R&D collaboration, EU Framework Programmes, Complex Networks, Small World Effect, Centrality Measures, European Research Area |
| JEL: | L14 O38 Z13 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:unumer:2006036&r=net |
| By: | Pablo Brañas-Garza (Universidad de Granada); Ramón Cobo-Reyes (Universidad de Granada); Maria Paz Espinosa (Universidad del País Vasco); Natalia Jiménez (Universidad de Alicante); Giovanni Ponti (Università di Ferrara; Universidad de Alicante) |
| Abstract: | This paper explores the role of social integration on altruistic behavior. To this aim, we develop a two-stage experimental protocol based on the classic Dictator Game. In the first stage, we ask a group of 77 undergraduate students in Economics to elicit their social network; in the second stage, each of them has to unilaterally decide over the division of a fixed amount of money to be shared with another anonymous member in the group. Our experimental design allows to control for other variables known to be relevant for altruistic behavior: framing and friendship/acquaintance relations. Consistently with previous research, we find that subjects favor their friends and that framing enhances altruistic behavior. Once we control for these effects, social integration (measured by betweenness, a standard centrality measure in network theory) has a positive effect on giving: the larger social isolation within the group, the more likely it is the emergence of selfish behavior. These results suggest that information on the network structure in which subjects are embedded is crucial to account for their behavior. |
| Keywords: | altruism, social integration, social networks, experiments |
| JEL: | C91 D64 Z13 |
| Date: | 2006–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:200604&r=net |
| By: | Pradeep Dubey (Dept. of Economics, SUNY-Stony Brook); Rahul Garg (IBM India Research Lab); Bernard De Meyer (PSE, Universite Paris) |
| Abstract: | There are many situations in which a customer's proclivity to buy the product of any firm depends not only on the classical attributes of the product such as its price and quality, but also on who else is buying the same product. We model these situations as games in which firms compete for customers located in a "social network." Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network. We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network. Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valuations of clients are anonymous. |
| Keywords: | Social network, Game theory, Nash equilibrium, Competition game on a social network |
| JEL: | A14 C72 D11 D21 L1 L2 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1591&r=net |