nep-net New Economics Papers
on Network Economics
Issue of 2007‒04‒09
eleven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Indirect Network Effects in New Product Growth By Stremersch, S.; Tellis, G.J.; Franses, Ph.H.B.F.; Binken, J.L.G.
  2. Network effects, Compatibility and the Environment: The Case of Hydrogen Powered Cars By Klaus Conrad
  3. Price Competition and Product Differentiation when Goods have Network Effects By Klaus Conrad
  4. Capacity Expansion in Markets with Intertemporal Consumption Externalities By Hiroshi Kitamura
  5. The Pricing of Academic Journals: A Two-Sided Market Perspective By Doh-Shin Jeon; Jean-Charles Rochet
  6. "Net Neutrality," Non-Discrimination and Digital Distribution of Content Through the Internet By Nicholas Economides
  7. Oligopoly Model of a Debit Card Network By Manchev, Peter
  8. Self Organization of Surface Transportation Networks By David Levinson; Bhanu Yerra
  9. Voting in small networks with cross-pressure By Ascensión Andina-Díaz; Miguel A. Meléndez-Jiménez
  10. How Land Use Shapes the Evolution of Road Networks By David Levinson; Bhanu Yerra
  11. The links between international production and innovation: a double link approach By Antonello Zanfei

  1. By: Stremersch, S.; Tellis, G.J.; Franses, Ph.H.B.F.; Binken, J.L.G. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Indirect network effects are of prime interest to marketers because they affect the growth and takeoff of software availability for, and hardware sales of, a new product. While prior work on indirect network effects in the economics and marketing literature is valuable, these literatures show two main shortcomings. First, empirical analysis of indirect network effects is rare. Second, in contrast to the importance the prior literature credits to the chicken-and-egg paradox in these markets, the temporal pattern ? which leads which? ? of indirect network effects remains unstudied. Based on empirical evidence of nine markets, this study shows, among others, that: (1) indirect network effects, as commonly operationalized by prior literature, are weaker than expected from prior literature; (2) in most markets we examined, hardware sales leads software availability, while the reverse almost never happens, contradicting existing beliefs. These findings are supported by multiple methods, such as takeoff and time series analyses, and fit with the histories of the markets we studied. The findings have important implications for academia, public policy and management practice. To academia, it identifies a need for new, and more relevant, conceptualizations of indirect network effects. To public policy, it questions the need for intervention in network markets. To management practice, it downplays the importance of the availability of a large library of software for hardware technology to be successful.
    Keywords: Indirect Network Effects;New Product Growth;Takeoff;Chicken-and-Egg;
    Date: 2007–03–28
  2. By: Klaus Conrad (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: The paper addresses the problem of entry barriers for a new technology – hydrogen powered cars or cars with fuel cell engines – if the network of its filling stations is missing or thin. We use Hotelling’s model of product differentiation to characterize a situation where an incumbent firm produces the old technology, compatible with the existing network of filling stations, and an entrant, who cannot use this network for its products. We assume that the entrant has to invest in remodeling existing filling stations for making them compatible. This, however, raises his costs. In the intertemporal setting of our model, the Hotelling pricing rule for exhaustible resources encourages the entrant to invest in compatibility because the price of gasoline will rise in the long run to the price of the backstop technology - fuel cells. Depending on the cost of compatibility, our model indicates three possible outcomes. Either, the costs of compatibility are too high and governmental support is required. Or the incumbent bears losses in initial periods by waiting for profits in later periods when full compatibility of the network is reached. Or the entrant benefits from the fact that the price of oil reaches the price of the backstop technology (full cells) rather soon.
    JEL: L11 L15 L62 Q42
  3. By: Klaus Conrad (Institut für Volkswirtschaft und Statistik (IVS))
    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 one with either the firm offering the conventional engine as the only producer, or one with the firm offering the new technology as the only producer, or one where 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.
    JEL: L11 Q38 H23 L62
  4. By: Hiroshi Kitamura (Graduate School of Economics, Osaka University)
    Abstract: This paper analyzes market capacity expansion in the presence of intertemporal consumption externalities such as consumer learning, networks, or bandwagon effects. The externality leads to an endogenous shift of market demand that responds to past market capacity. Whereas market capacity grows in waves, its magnitude depends on the degree of market concentration. The competitive environment contributes to S-shaped time patterns of market capacity expansion that is slow from the social viewpoint. On the other hand, using an introductory price, a monopolist plans an initially larger, but eventually smaller, amount of market cultivation than a competitive market capacity expansion.
    Keywords: Intertemporal consumption externalities; S-shaped diffusion; Market structure; Introductory price.
    JEL: D11 L11 L14
    Date: 2007–04
  5. By: Doh-Shin Jeon; Jean-Charles Rochet
    Abstract: More and more academic journals adopt an open-access policy, by which articles are accessible free of charge, while publication costs are recovered through author fees. We study the efficient pricing of an academic journal from a two-sided market perspective and the consequences of the open access policy on the journal’s quality standard. When the journal’s objective is to maximize social welfare, open access is optimal if and only if the positive externalities generated by its diffusion exceed the marginal cost of distribution. This condition is satisfied in particular for an electronic journal for which the marginal cost of distribution is zero. However, we show that if the journal is run by a not-for-profit association that has a different objective (such as maximizing the utility of its readers or the impact of the journal), the move from the traditional reader-pays model to the open-access model may result in a decrease in quality standard below the socially efficient level. In some cases, it may even lead to a reduction in readership size.
    Keywords: Academic Journals, Open-Access, Reader-Pays, Two-Sided Market, Endogenous Quality
    JEL: D42 L44 L82
    Date: 2007–03
  6. By: Nicholas Economides
    Date: 2007
  7. By: Manchev, Peter
    Abstract: The paper builds an oligopoly model of a debit card network. It examines the competition between debit card issuers. We show that there is an optimal pricing for the debit card network, which maximizes all issuer's revenues. The paper also shows that establishing a link between debit card networks averages the costs provided that there is no growth in the customer's usage of the networks, resulting from the link.
    Keywords: debit card; payment networks; switch fees; access pricing
    JEL: G21 L13
    Date: 2006–07–28
  8. By: David Levinson (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota); Bhanu Yerra
    Abstract: This research investigates the self-organization of surface transportation networks. Using a travel demand model coupled with revenue, cost, and investment models, experiments are run under a variety of parameters on a grid network. It is found that roads, contiguous sections of multiple links operating with similar characteristics, and hierarchies of roads emerge under a broad range of assumptions from networks with neither defined roads nor clearly organized hierarchies. The factors which drive this are the (dis)economies of scale, the presence of boundaries, and any initial asymmetry in the network. This research thus finds that roads and hierarchies, which are often thought to be the product of conscious design, can also arise without such intention.
    Keywords: Self-organization, network growth, network evolution, transportation planning
    JEL: R40 R42 R48 D10 D83 D85 O33
    Date: 2006
  9. By: Ascensión Andina-Díaz; Miguel A. Meléndez-Jiménez
    Abstract: We present a model of participation in elections in small networks, in which citizens su¤er from cross-pressures if voting against the alternative preferred by some of their social contacts. We analyze how the existence of cross-pressures may shape voting decisions, and so, political outcomes; and how candidates may exploit this e¤ect to their interest.
    Keywords: Network; Voting; Cross-Cutting.
    JEL: D72
  10. By: David Levinson (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota); Bhanu Yerra
    Abstract: The present research develops an agent-based model to treat the organization, growth, and contraction of network elements. The components model travel demand, revenue, cost, and investment. Revenue earned by links in excess of maintenance costs is invested on the link to until all revenue is consumed. After upgrading (or downgrading) each link in the network, the time period is incremented and the whole process is repeated until an equilibrium is reached or it is clear that it cannot be achieved. The model is tested with three alternative land use patterns: uniform, random, and bell-shaped, to test the effects of land use on resulting network patterns. It is found that similar, but not identical, equilibrium hierarchical networks result in all cases, with the bell-shaped network, with a CBD, having higher level roads concentrated in a belt around the CBD, while the other networks are less concentrated
    Keywords: Self-organization, network growth, network evolution, transportation planning, land use planning
    JEL: R40 R42 R48 R14 D10 D83 D85 O33
    Date: 2006
  11. By: Antonello Zanfei (Department of Economics, Università di Urbino "Carlo Bo")
    Abstract: This paper examines the changing role of multinationals in the global generation, adoption and transfer of innovation. It is argued that the combination of traditional asset exploiting objectives with increasing asset seeking activities entails a transition of multinationals towards a double network structure. On the one hand multinationals are more and more characterised by the interconnection of a large number of internal units that are deeply involved in the company’s use, generation and absorption of knowledge. On the other hand, units belonging to the internal network tend to develop external networks with other firms and institutions that are located outside the boundaries of the multinational firm, in order to increase the potential for use, generation and absorption of knowledge. Extending the analysis to a more general level, it is suggested that each of the external actors with which multinationals are interconnected across countries are themselves involved in extensive webs of relationships with other firms and institutions. By becoming embedded in different local contexts, multinational firms act as bridging institutions connecting a number of geographically dispersed economic and innovation systems. As a result, they are conditioned by, and contribute to, the evolution of different contexts in which they operate.
    Keywords: innovation, multinational firms, networks.
    JEL: F10 F23 O33
    Date: 2007–03

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