nep-net New Economics Papers
on Network Economics
Issue of 2007‒09‒24
four papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Differentiated Networks: Equilibrium and Efficiency By Rossella Argenziano
  2. Environmental Innovation, War of Attrition and Investment Grants By Cesare Dosi; Michele Moretto
  3. First versus Second-Mover Advantage with Information Asymmetry about the Size of New Markets By Eric Rasmusen; Young-Ro Yoon
  4. Dynamics of knowledge creation and transfer: The two person case By Berliant, Marcus; Fujita, Masahisa

  1. By: Rossella Argenziano
    Abstract: We consider a model of price competition in a duopoly with product differentiation and network effects. The value of a good for a consumer is the sum of a common and an idiosyncratic component. The first captures the vertical dimension of quality, the second captures horizontal differentiation. Each consumer privately observes his own value for each good, but cannot separate the common and the idiosyncratic component. Therefore, he has incomplete information about the value of the goods for the other consumers. After firms announce prices, consumers choose simultaneously which network to join, facing a coordination problem. In the efficient allocation, both networks are active and the firm with the highest expected quality has the largest market share. To characterize the equilibrium allocation, we derive necessary and sufficient conditions for uniqueness of the equilibrium of the coordination game played by consumers for given prices. The equilibrium allocation differs from the efficient one for two reasons. First, the equilibrium allocation of consumers to the networks is too balanced, since consumers fail to internalize network externalities. Second, if access to the networks is priced by strategic firms, then the product with the highest expected quality is also the most expensive. This further reduces the asymmetry between market shares and therefore social welfare.
    Date: 2007–09–18
  2. By: Cesare Dosi (Università di Padova); Michele Moretto (Università di Padova)
    Abstract: The paper analyses the timing of spontaneous environmental innovation when second-mover advantages, arising from the expectation of declining investment costs, increase the option value of waiting created by investment irreversibility and uncertainty about private payoffs. We then focus on the design of public subsidies aimed at bridging the gap between the spontaneous time of technological change and the socially desirable one. Under network externalities and incomplete information about firms’ switching costs, auctioning investment grants appears to be a cost-effective way of accelerating pollution abatement, in that it allows targeting grants instead of subsidizing the entire industry indiscriminately
    Keywords: Environmental innovation, Investment irreversibility, Network externalities, Investment grants, Second-price auction.
    JEL: Q28
    Date: 2007–09
  3. By: Eric Rasmusen (Indiana University Bloomington); Young-Ro Yoon (Indiana University Bloomington)
    Abstract: Is it better to move first, or second--- to innovate, or to imitate? Suppose one player has superior information about which of two new markets is better. If he enters first, he might be able to secure a natural monopoly. (The less-informed player also has this motive.) If he enters second, he can prevent the other player from imitating him. We find, predictably, that the more accurate the informed player's information the more he wants to delay in order to prevent the spillover of his information. Also, the less accurate the informed player's information the more he wants to move first in order to foreclose a market. In addition, the bigger the difference in markets, the more likely the two players will make the same choice. More surprisingly, if the informed player's information becomes more accurate that can hurt both industry profits and consumer welfare by inducing both players to choose what they hope is the bigger market, leaving the other market not served.
    Keywords: Market Entry, First- and Second Mover Advantage, Payoff Externalities, Informational Externalities, Endogenous Timing
    JEL: D81 D82 L13
    Date: 2007–09
  4. By: Berliant, Marcus; Fujita, Masahisa
    Abstract: This paper presents a micro-model of knowledge creation and transfer for a couple. Our model incorporates two key aspects of the cooperative process of knowledge creation: (i) heterogeneity of people in their state of knowledge is essential for successful cooperation in the joint creation of new ideas, while (ii) the very process of cooperative knowledge creation affects the heterogeneity of people through the accumulation of knowledge in common. The model features myopic agents in a pure externality model of interaction. In the two person case, we show that the equilibrium process tends to result in the accumulation of too much knowledge in common compared to the most productive state. Equilibrium paths are found analytically, and they are a discontinuous function of initial heterogeneity.
    Keywords: knowledge creation; knowledge transfer; knowledge externalities; endogenous agent heterogeneity
    JEL: D83 O31 R11
    Date: 2007–09–18

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