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on Network Economics |
| By: | Ludovic Renou; Tristan Tomala |
| Abstract: | This paper characterizes the class of communication networks for which, in any environment (utilities and beliefs), every incentive-compatible social choice function is (partially) implementable. Among others, in environments with either common and independent beliefs and private values or a bad outcome, we show that if the communication network is 2-connected, then any incentive-compatible social choice function is implementable. A network is 2-connected if each player is either directly connected to the designer or indirectly connected to the designer through at least two disjoint paths. We couple encryption techniques together with appropriate incentives to secure the transmission of each player’s private information to the designer. |
| Keywords: | Mechanism design; incentives; Bayesian equilibrium; communication networks; encryption; secure transmission; coding |
| JEL: | C7 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:08/35&r=net |
| By: | William Roberds; Stacey L. Schreft |
| Abstract: | This paper presents a monetary-theoretic model to study the implications of networks' collection of personal identifying data and data security on each other's incidence and costs of identity theft. To facilitate trade, agents join clubs (networks) that compile and secure data. Too much data collection and too little security arise in equilibrium with noncooperative networks compared with the efficient allocation. A number of potential remedies are analyzed: mandated limits on the amount of data collected, mandated security levels, reallocations of data-breach costs, and data sharing through a merger of the networks. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2008-22&r=net |
| By: | Jason Allen; Robert Clark; Jean-François Houde |
| Abstract: | This paper studies the role that market structure plays in affecting the diffusion of electronic banking. Electronic banking (and electronic commerce more generally) reduces the cost of performing many types of transactions for firms. The full benefits for firms from adoption, however, only accrue once consumers begin to perform a significant share of their transactions online. Since there are learning costs to adopting the new technology firms may try to encourage consumers to go online by affecting the relative quality of the online and offline options. Their ability to do so is a function of market structure. In more competitive markets, reducing the relative attractiveness of the offline option involves the risk of losing customers (or potential customers) to competitors, whereas, this is less of a concern for a more dominant firm. We develop a model of branch-service quality choice with switching costs meant to characterize the trade-off banks face when rationalizing their network between technology penetration and business stealing. The model is solved numerically and we show that the incentive to lower branch-service quality and drive consumers into electronic banking is greater in more concentrated markets and for more dominant banks. We find support for the predictions of the model using a panel of household survey data on electronic payment usage as well as branch location data, which we use to construct measures of branch quality. |
| Keywords: | Financial institutions; Market structure and pricing |
| JEL: | D14 D4 G21 L1 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-32&r=net |
| By: | Kemppainen, Kari (Bank of Finland Research) |
| Abstract: | Using a spatial competition model of retail payment networks, this paper discusses the likely economic consequences associated with the formation of the Single Euro Payments Area (SEPA). The model considers an expansion of positive network externalities on the demand side and adjustment cost on the supply side and reveals that the introduction of SEPA may not lead to a fully competitive and integrated retail payment markets. This is especially the case when the markets are segments before the introduction of SEPA. In such a scenario, the post-integrated markets are likely to remain segmented or will be characterised by a kinked equilibrium where no significant price competition takes place. In both outcomes, SEPA leads to increased prices, larger network sizes (ie increased number of customers) and a higher consumer surplus. Additionally, if the SEPA-induced adjustment costs for payment networks are not prohibitively high, SEPA may also lead to an increase in both profits and social welfare. |
| Keywords: | integration; network effects; retail payments |
| JEL: | G21 L14 L15 |
| Date: | 2008–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2008_022&r=net |
| By: | Victor Aguirregabiria; Chun-Yu Ho |
| Abstract: | This paper studies the contribution of demand, costs, and strategic factors to the adoption of hub-and-spoke networks in the US airline industry. Our results are based on the estimation of a dynamic oligopoly game of network competition that incorporates three groups of factors which may explain the adoption of hub-and-spoke networks: (1) travelers value the services associated with the scale of operation of an airline in the hub airport (e.g., more convenient check-in and landing facilities); (2) operating costs and entry costs in a route may decline with an airline's scale operation in origin and destination airports (e.g., economies of scale and scope); and (3) a hub-and-spoke network may be an effective strategy to deter the entry of other carriers. We estimate the model using data from the Airline Origin and Destination Survey with information on quantities, prices, and entry and exit decisions for every airline company in the routes between the 55 largest US cities. As a methodological contribution, we propose and apply a simple method to deal with the problem of multiple equilibria when using the estimated model to predict the effects of changes in structural parameters. We find that the most important factor to explain the adoption of hub-and-spoke networks is that the cost of entry in a route declines very importantly with the scale of operation of the airline in the airports of the route. For some of the larger carriers, strategic entry deterrence is the second most important factor to explain hub-and-spoke networks. |
| Keywords: | Airline industry; Hub-and-spoke networks; Entry costs; Industry dynamics; Estimation of dynamic games; Counterfactuals with multiple equilibria |
| JEL: | C10 C35 C63 C73 L10 L13 L93 |
| Date: | 2008–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-337&r=net |