nep-net New Economics Papers
on Network Economics
Issue of 2007‒10‒27
eleven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Language, meaning and games: a model of communication, coordination and evolution By Stefano Demichelis; Jörgen W. Weibull
  2. Net Neutrality on the Internet: A Two-sided Market Analysis By Nicholas Economides; Joacim Tag
  3. Network Formation in the Political Blogosphere. An Application of Agent Based Simulation and e-Research Tools By Ackland, Robert; Shorish, Jamsheed
  4. Price Discrimination in Two-Sided Markets By Qihong Liu; Konstantinos Serfes
  5. Vertical Integration and Exclusivity in Two-Sided Markets By Robin S. Lee
  6. Network Economics and the Digital Divide in Rural India By Jake Kendall; Nirvikar Singh; Kristin Williams; Yan Zhou; P.D. Kaushik
  7. Congestion and Market Structure in the Airline Industry By Itai Ater; ;
  8. Quantifying the Benefits of Entry into Local Phone Service By Nicholas Economides; Katja Seim; V. Brian Viard
  9. Spectrum Property Rights Versus a Commons Model: Exploitation of Mesh Networks By Paul Levine; Klaus Moessner; Neil Rickman
  10. Crowding Out or Complementarity in the Telecommunications Market? By Ricardo Ribeiro; João Vareda;
  11. Optimal Administered Incentive Pricing of Spectrum By Paul Levine; Neil Rickman

  1. By: Stefano Demichelis; Jörgen W. Weibull
    Abstract: Language is arguably a powerful coordination device in real-life interactions. We here develop a game-theoretic model of two-sided pre-play communication that generalizes the cheap-talk approach by way of introducing a meaning correspondence between messages and actions, and postulating two axioms met by natural languages. Deviations from this correspondence are called dishonest and players have a lexicographic preference for honesty, second to material payoffs. The model is first applied to finite and symmetric two-player games and we establish that, in generic and symmetric n x n -coordination games, a Nash equilibrium component in such a lexicographic communication game is evolutionarily stable if and only if it results in the unique Pareto efficient outcome of the underlying game. We discus Aumann’s (1990) example of a Pareto efficient equilibrium that is not self-enforcing. We also extend the approach to one-sided communication.
    Keywords: Communication, coordination, language, honesty, evolutionary stability.
    JEL: C72 C73 D01
    Date: 2007
  2. By: Nicholas Economides; Joacim Tag
    Date: 2007
  3. By: Ackland, Robert (Australian Demographic and Social Institute, The Australian National University, Canberra, Australia); Shorish, Jamsheed (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: The political blogosphere has recently been the focus of attention for social network analysis and applications of network and graph theory. In a recent paper, Adamic and Glance (2005) report differences between the linking behavior of politically conservative vs. politically liberal Web bloggers. We construct a simple agent-based network formation model which shows that one such difference, demonstrating what we term ‘political homophily’, can be generated by connecting the blogosphere to the underlying population distribution of political preferences. The model is implemented as a web service in the e-tool VOSON (Virtual Observatory for the Study of Online Networks), and both model and tool serve to define a natural environment for research into link formation behavior with large numbers of heterogeneous network participants.
    Keywords: Network formation, Social network analysis, Blogosphere, VOSON, Agentbased simulation
    JEL: D85 C63 L86
    Date: 2007–10
  4. By: Qihong Liu (Department of Economics, University of Oklahoma); Konstantinos Serfes (LeBow College of Business, Drexel University)
    Abstract: We examine the profitability and the welfare implications of price discrimination in two-sided markets. Platforms have information about the preferences of the agents that allows them to price discriminate within each group. The conventional wisdom from one-sided horizontally differentiated markets is that price discrimination hurts the firms and benefits consumers, prisoners' dilemma. Moreover, it is well-known that the presence of indirect externalities in two-sided markets can intensify the competition. Despite all these, we show that the possibility of price discrimination, in a two-sided market, may actually soften the competition. Therefore, the implications of price discrimination from one-sided markets may not carry over to two-sided markets. This is the case regardless of whether prices are public or private, although private prices boost profits. Our analysis also sheds light on the welfare properties of price discrimination in intermediate goods markets, such as Business-to-Business (B2B) markets.
    Keywords: Price discrimination, Two-sided markets, Indirect network externalities, Market segmentation.
    JEL: D43 L13
    Date: 2007–09
  5. By: Robin S. Lee (Harvard Busines School and Department of Economics, Harvard University)
    Abstract: This paper develops techniques to analyze the adoption decisions of both consumers and firms for competing platform intermediaries in two-sided markets, and applies the methodology to empirically measure the impact of vertical integration and exclusive contracting in the sixth-generation of the U.S. videogame industry (2000-2005). I first introduce a framework to structurally estimate consumer demand in these types of hardware-software markets which (i) simultaneously analyzes both hardware and software adoption decisions; (ii) accounts for dynamic issues including the selection of heterogenous consumers across platforms, durability of goods, and agents’ timing of purchases; and (iii) explicitly provides the marginal contribution of an individual software title to each platform’s installed base of users. Demand results show the gains obtained by a platform provider from exclusive access to certain software titles can be large, and failure to account for dynamics, consumer heterogeneity, and multiple hardware purchases significantly biases estimates. I next specify dynamic network formation game to model the adoption decision of hardware platforms by software providers. Counterfactual experiments indicate that vertical integration and exclusivity benefited the smaller entrant platforms and not the dominant incumbent, which stands contrary to the interpretation of exclusivity as primarily a means of foreclosure and entry deterrence.
    Keywords: platform competition, two-sided markets, vertical integration, exclusive contracting, dynamic demand, network formation, videogame industry
    JEL: C61 C63 C73 L13 L14 L42 L86
    Date: 2007–10
  6. By: Jake Kendall (University of California Santa Cruz); Nirvikar Singh (University of California Santa Cruz); Kristin Williams (University of California Santa Cruz); Yan Zhou (California State University, Sacramento); P.D. Kaushik (Rajiv Gandhi Institute of Contemporary Studies)
    Abstract: The idea of a ‘global digital divide’ is well accepted, and cross-country studies of determinants of differences in computer and Internet penetration have identified income, telecommunications infrastructure, and regulatory quality as key influencing factors. The policy implications from these studies are relatively blunt: get richer, have more telephones, and regulate telecommunications better. In this paper, we examine an alternative policy approach to bridging the digital divide, through organizational innovations that provide low cost Internet access in developing countries, within the existing levels of income, telecommunications infrastructure and regulatory environment. We use survey data from 500 individuals in four states of India: Haryana, Madhya Pradesh, Punjab and Rajasthan, to examine factors influencing patterns of computer and Internet use. The situations in which data was collected were ones where computer and Internet access was being provided by a developmental agency (government or non-government). We estimate logit and multinomial logit models, using explanatory variables such as income, household size, education, and occupation, as well as infrastructure factors such as quality of electricity supply, and availability of telephones and televisions. Thus we are able to go beyond simple analyses of penetration at the country level, to understand the microeconomics of computer and Internet use in rural India. In particular, by examining patterns of use, we are able to comment on the importance of network externalities for diffusion of computers and the Internet in these local rural contexts.
    Keywords: IT, ITC, Internet, India, Development, Digital Divide
    JEL: L86 O1
    Date: 2007–09
  7. By: Itai Ater (Stanford University, Economics Department); ;
    Abstract: Empirical research on the relationship between market congestion and the market competitive level largely falsifies the positive relationship predicted by theoretical models. In this paper, I exploit the airline industry network structure and focus on the level of congestion during periods in which passengers cross-connect to their final destinations. About 70% of hub airport flights depart or land during these periods. The empirical analysis establishes a strong positive relationship. Furthermore, based on a simple theoretical model, I am able to quantify the potential time savings from eliminating congestion externalities and find that, on average, a flight can save 2 minutes of flight time at its departing airport and another 1.5 minutes at its destination airport. I also find that airlines choose to pad their schedule particularly on competitive routes, presumably to attract uninformed passengers. JEL classification: L93; R41;
    Keywords: Congestion; Air Transportation;
    Date: 2007–09
  8. By: Nicholas Economides; Katja Seim; V. Brian Viard
    Date: 2007
  9. By: Paul Levine (University of Surrey); Klaus Moessner (University of Surrey); Neil Rickman (University of Surrey and CEPR)
    Abstract: This paper combines models and ideas from radio-engineering literature and economics to address the need for regulation of spectrum allocation in a commons scenario. It discusses under what conditions a laissez-faire policy towards spectrum usage would engender the inefficiencies of a spectrum com- mons allocation regime; to overcome such potential inefficiency, centralised allocation or a formal market for spectrum (with well-defined property rights) is required.
    Keywords: mesh networks, spectrum allocation, spectrum commons model
    JEL: L10 L50 L96
    Date: 2007–07
  10. By: Ricardo Ribeiro (STICERD, The London School of Economics and Political Science); João Vareda (Faculdade de Economia, Universidade Nova de Lisboa,);
    Abstract: There is a substantial number of cases where the a priori relationship between products is not at all clear in the sense that although apparent to be clear substitutes may turn out to be in fact complements, or vice-versa. This paper aims to study the relationship between fixed and mobile telephony in the United Kingdom and, in particular, address the question if mobile communications crowded out fixed telephony or if, on the other hand, the two types of communications are in fact complements. We estimate a structural continuous-choice demand model following Pinkse et al. (2002), Pinkse and Slade (2004), and Slade (2004) and we find that at the current diffusion stage, fixed and mobile communications appear to be complements. Given that the model is micro-founded, we also address the question of how the evolution of the price differential between the two types of communication may, respectively, affect the welfare of consumers and firms. We find that the continuation of these price trends have substantial welfare benefits for subscribers and at the same time have no significant impact on the profits for firms. Finally, we present some economic policy implications, especially about the need to (de)regulate telecommunications provision.
    Keywords: Telecommunications, Mobile, Fixed, Demand, Substitution, Complementarity
    JEL: C13 D12 L51 L96
  11. By: Paul Levine (University of Surrey); Neil Rickman (University of Surrey & CEPR)
    Abstract: Administered Incentive Pricing (AIP) of radio spectrum as advocated by Smith/NERA (1996) and recently assessed by Indepen (2003) envisages an incremental path towards e±cient pricing, with revealed and stated prefer- ence methods being used to reveal opportunity costs. We build on the latter to develop and optimal pricing scheme that allows for consumer surplus, in- terference constraints and their implications for productive e±ciency, revenue implications and market structure. We demonstrate the subtle relationship between the interference constraints and the pricing and channel use decisions of network operators. We proceed to show that the optimal AIP is higher in sectors where spectrum can be shared and that it acts as Ramsey tax across sectors of the economy, i.e., is inversely related to the elasticity of demand. As a special case of our model we examine optimal pricing where the regula- tor is constrained to ignore the revenue implications. Then optimal spectrum prices are lower and the relationship between prices and the ability to share spectrum is reversed.
    Keywords: radio spectrum, spectrum pricing, administered incentive pricing
    JEL: L10 L50 L96
    Date: 2007–10

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