nep-net New Economics Papers
on Network Economics
Issue of 2008‒10‒21
thirteen papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Incentives to Invest and to Give Access to Non-Regulated Next Generation Networks By Duarte Brito; Pedro Pereira; João Vareda
  2. Interconnecting Differentiated Networks By Alexei Alexandrov; ;
  3. Decomposing the Congestion Effect and the Cross-Platform Effect in Two-Sided Networks: A Field Experiment By Catherine Tucker; Juanjuan Zhang;
  4. Network Effects and Geographic Concentration of Industry By Zhu Wang; Daniel Yi Xu
  5. Entrepreneurial Innovations in Network Industries By Pehr-Johan Norbäck; Lars Persson; Joacim Tåg
  6. Competition vs. Regulation in Mobile Telecommunications By Johan Stennek; Thomas TangerŒs;
  7. Computer Virus Propagation in a Network Organization: The Interplay between Social and Technological Networks By Hsing Kenneth Cheng; Hong Guo;
  8. Ad-sponsored Business Models and Compatibility Incentives of Social Networks By Feng Zhu
  9. Network Structure and Strategic Investments: An Experimental Analysis By Stephanie Rosenkranz; Utz Weitzel
  10. Social Interactions, Network Fluidity and Network Effects By Catherine Tucker; ;
  11. Who's Who in Networks. Wanted: the Key Group By Umed Temurshoev; ;
  12. The Diffusion of Fixed Broadband: An Empirical Analysis By Sangwon Lee; Justin S. Brown
  13. Estimating a Model of Strategic Store Network Choice with Policy Simulation By Mitsukuni Nishida; ;

  1. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência and IST); João Vareda (Autoridade da Concorrência and Universidade Nova de Lisboa)
    Abstract: We analyze the incentives of a telecommunications incumbent to invest and give access to a downstream entrant to a next generation network. We model the industry as a duopoly, where a vertically integrated incumbent and a downstream entrant, that requires access to the incumbent's network, compete on Hotelling's line. The incumbent can invest in the deployment of a NGN that improves the quality of the retail services. Access to the old network is regulated, but access to the new network is not. If the innovation is drastic, the incumbent always invests in the NGN, but does not give access to the entrant. If the innovation is non-drastic and if the access price to the old network is low, the incumbent voluntarily gives access to the NGN. If the innovation is non-drastic, there is no monotonic relation between the access price to the old network and the incumbent's incentives to invest. A regulatory moratorium emerges as socially optimal, if the innovation is large but non-drastic. We also analyze the case where both firms can invest in the deployment of a NGN.
    Keywords: Next Generation Networks, Investment, Access, Regulation
    JEL: L43 L51 L96 L98
    Date: 2008–10
  2. By: Alexei Alexandrov (Simon Graduate School of Business, University of Rochester); ;
    Abstract: I examine interconnection decisions of differentiated firms. I find that previous results that firms never interconnect enough do not hold. In a Hotelling model consumers may suffer from interconnection, and firms may interconnect when it is not socially optimal. The firms interconnect too much when the network effects are steeper - this makes firms compete much less aggressively after interconnection, raising prices for consumers and profits for firms. Price and profit rise results holds under quality and installed base asymmetries, or only some firms in the industry interconnecting. More dimensions of differentiation make interconnection less attractive.
    Keywords: network effects, interconnection, oligopoly, product differentiation
    JEL: D43 L15
    Date: 2008–10
  3. By: Catherine Tucker (MIT Marketing); Juanjuan Zhang (;
    Abstract: This paper highlights how the provision of information about user participation can serve as a strategic marketing tool for firms seeking to grow two-sided exchange networks. A two-sided exchange network is a business model (such as Ebay or Craiglist) where revenue is generated from persuading people to buy and sell items through that particular exchange. It is not immediately clear whether broadcasting information about the number of sellers will grow further seller participation. On the one hand, a strong rival presence may dissipate payoff (a ``congestion effect''). On the other hand, a large number of rivals may signal high buyer demand (a ``cross-platform effect''). We use field experiment data from a B2B web site that brings together buyers and sellers of used equipment and real estate. Before each seller made a posting request, the web site randomized whether to disclose the number of buyers and/or sellers, and the exact number to disclose. We find that when presented together with the number of buyers, a larger number of sellers makes sellers less likely to list their products, indicating a negative congestion effect. However, when the number of sellers is presented in isolation, its negative impact on entry is significantly reduced, indicating a positive cross-platform effect. Higher buyer search intensity amplifies the moderating role of demand uncertainty. The results suggest that information on the number of users can be an effective tool to grow two-sided networks but should be used strategically. A network can attract more users by advertising dense competition when demand is not transparent, especially in search-intensive markets.
    Keywords: Network Effects, Local Networks, Stability, Option-Value
    Date: 2008–10
  4. By: Zhu Wang (Economic Research Department, Federal Reserve Bank of Kansas City.); Daniel Yi Xu (Department of Economics, New York University.)
    Abstract: This paper provides a theory of “family network”, in contrast to “local externalities”, to explain the geographic concentration of industry. For many industries, one most important source of entrants is spinoffs, who typically locate near parent firms and benefit from knowledge linkage and business relation within the family network. As a result, firms are more likely to enter and less likely to exit if they are associated with a large family. Using a unique dataset of US automobile industry in its early years, we identify six historically important production centers and sixty spinoff families. Our empirical analysis disentangles the effect of “family networks” from other “local externalities,” and provides strong evidence that it was the former rather than the latter that caused the geographic concentration of US automobile production.
    Keywords: Spinoffs, Entry and Exit, Geography of Industry
    JEL: J6 L0 R1
    Date: 2008–09
  5. By: Pehr-Johan Norbäck (Research Institute of Industrial Economics (IFN)); Lars Persson (Research Institute of Industrial Economics (IFN)); Joacim Tåg (Research Institute of Industrial Economics (IFN))
    Abstract: In this paper, we study entrepreneurial innovations in an industry characterized by network effects. We show that the presence of network externalities tends to make the entrepreneur prefer sale to entry. Moreover, we also show that the incentive to innovate for entry decreases when network effects become stronger, whereas there is an increase in the incentive for innovation for sale. Moreover, we show that increasing the degree of industry-wide standardization furthers the goal of increasing entry by entrepreneurs. However, this may come at the cost of reducing the research intensity by reducing the bidding competition among incumbents over the innovations of entrepreneurs.
    Keywords: Entrepreneurship, Entry, Compatibility, Innovation, Network Effects, Standardization.
    JEL: D40 L10
    Date: 2008–09
  6. By: Johan Stennek (Gothenburg University); Thomas TangerŒs (Research Institute of Industrial Economics);
    Abstract: This paper questions whether competition can replace sector-specific regulation of mobile telecommunications. We show that the monopolistic outcome may prevail independently of market concentration when access prices are determined in bilateral negotiations. A lighthanded regulatory policy can induce effective competition. Call prices are close to the marginal cost if the networks are sufficiently close substitutes. Neither demand nor cost information is required. A unique and symmetric call price equilibrium exists under symmetric access prices, provided that call demand is sufficiently inelastic. Existence encompasses the case of many networks and high network substitutability.
    Keywords: network competition; two-way access; mobile termination rates; entry; collusion
    JEL: L12 L14 L51 L96
    Date: 2008–09
  7. By: Hsing Kenneth Cheng (Department of Information Systems & Operations Management, University of Florida); Hong Guo (Department of Information Systems & Operations Management, University of Florida);
    Abstract: This paper proposes a holistic view of a network organization’s computing environment to examine computer virus propagation patterns. We empirically examine a large-scale organizational network consisting of both social network and technological network. By applying information retrieval techniques, we map nodes in the social network to nodes in the technological network to construct the composite network of the organization. We apply social network analysis to study the topologies of social and technological networks in this organization. We statistically test the impact of the interplay between social and technological network on computer virus propagation using a susceptible-infective-recovered epidemic process. We find that computer viruses propagate faster but reach lower level of infection through technological network than through social network, and viruses propagate the fastest and reach the highest level of infection through the composite network. Overlooking the interplay of social network and technological network underestimates the virus propagation speed and the scale of infection.
    Keywords: social network analysis, interplay between social and technological networks, computer viruses
    JEL: C15 D85 C89
    Date: 2008–10
  8. By: Feng Zhu (Marshall School of Business, University of Southern California)
    Abstract: This paper examines social networks' incentives to establish compatibility under fee and ad-sponsored business models. I analyze the competition between two social networks and show that compatibility is only possible when the two networks are ad-sponsored. I also find that even when both networks are ad-sponsored, a network with a significant installed-base advantage may choose not to be compatible when the cost from sharing the market outweighs the benefit from additional ad profits. Finally, compatibility also requires a significant number of single-homing users. The results are consistent with empirical observations of social networks and suggest that increased adoption of ad-sponsored business models may lead to many de-facto standards in high-technology industries.
    Keywords: Ad-sponsored, Compatibility, Social networks, Business models
    JEL: L15 L10 M21
    Date: 2008–09
  9. By: Stephanie Rosenkranz; Utz Weitzel
    Abstract: This paper analyzes the effects of network positions and individual risk attitudes on individuals' strategic decisions in an experiment where actions are strategic substitutes. The game theoretic basis for our experiment is the model of Bramoulle and Kranton (2007). In particular, we are interested in disentangling the influence of global, local and individual factors. We study subjects' strategic investment decisions in four basic network structures. As predicted, we find that global factors, such as the regularity of the network structure, influence behavior. However, we also find evidence that individual play in networks is to some extent boundedly rational, in the sense that coordination is influenced by local and individual factors, such as the number of (direct) neighbors, local clustering and individuals' risk attitudes.
    Keywords: networks, experiment, coordination, strategic substitutes, risk aversion
    JEL: C91 D00 D81 D85 C72 H41
    Date: 2008–05
  10. By: Catherine Tucker (MIT Marketing); ;
    Abstract: This paper asks how much the strength of network effects depends on the stability and structure of the underlying social network. I answer this using extensive micro-data on all potential adopters of a firm's internal video-messaging system and their subsequent video-messaging. This firm's New York office had to be relocated due to the terrorist attacks of 2001 which lead to a physical re-organization of teams in that city but not in other comparable cities. I study the consequences of this disruption for adoption of video-messaging and the size of network effects. I find evidence that generally network effects are based on direct social interactions. Potential adopters react to adoption only by people they wish to communicate with: They are not affected by adoption by other people. However, when there is a disruption to the social network and communication patterns become less predictable, users become more responsive to adoption by a broader group of users.
    Keywords: Network Effects, Local Networks, Stability, Option-Value
    JEL: K21 Q31 Q34 L42 L40 L12
    Date: 2008–10
  11. By: Umed Temurshoev (Department of Economics and SOM Research School, University of Groningen); ;
    Abstract: Ballester, Calvo-Armengol, and Zenou (2006, Econometrica, 74/5, pp. 1403-17) show that in a network game with local payoff complementarities, together with global uniform payoff substitutability and own concavity effects, the intercentrality measure identifies the key player - a player who, once removed, leads to the optimal change in overall activity. In this paper we search for the key group in such network games, whose members are, in general, different from the players with the highest individual intercentralities. Thus the quest for a single target is generalized to a group selection problem targeting an arbitrary number of players, where the key group is identified by a group intercentrality measure. We show that the members of a key group are rather nonredundant actors, i.e., they are largely heterogenous in their patterns of ties to the third parties.
    Keywords: social networks, centrality measures, intercentrality measures, clusters, policies
    JEL: A14 C72 L14
    Date: 2008–09
  12. By: Sangwon Lee (Communication Department, Jamestown College); Justin S. Brown (University of Florida)
    Abstract: Broadband infrastructure is a key component of the knowledge economy. Broadband connections on both fixed and mobile networks are becoming an indicator of the knowledge economy. Employing the largest secondary data set, this study examines adoption factors of fixed broadband. The result of nonlinear and linear regression analysis of fixed broadband deployment suggests local loop unbundling (LLU) policy, platform completion between different broadband technologies and other diverse industry, ICT (Information and Communication Technology) and demographic factors influence fixed broadband diffusion. Specifically, the regression analysis of fixed broadband penetration found different types of LLU policies and previous fixed broadband penetration are significant factors of fixed broadband deployment. Some of the significant factors of fixed broadband deployment are different in developed countries than developing countries. This finding suggests, countries fostering broadband deployment need to adopt LLU policy for broadband, but the costs and benefits of the different LLU policy types should be carefully considered. Interestingly, the result of nonlinear regressions of fixed-broadband penetration suggest high levels of platform competition are related to high levels of fixed-broadband penetration, but the effects of platform competition are not statistically significant in OECD countries. This outcome is consistent with the result of linear regression analysis of developed countries (high income ITU membership countries). Considering OECD countries are composed of 30 developed countries with comparatively high GDP per capita, this result is robust. Taking into account this study’s results as well as previous empirical studies on fixed broadband deployment, the effects of platform competition are strong in the initial deployment of fixed-broadband, but the effects of platform competition are decreasing when the broadband market size is sufficiently large or the broadband market is mature. Also, as expected, previous fixed- broadband penetration was found to be an influential factor of current fixed-broadband deployment in all ITU membership countries, whether characterized as developed or developing countries. Considering impacts of platform competition in ITU membership countries, currently it appears in many countries that network effects and the effects of platform competition co-exist.
    Keywords: Broadband diffusion; fixed broadband; platform competition; network effect
    JEL: O25 O38 O50
    Date: 2008–09
  13. By: Mitsukuni Nishida (Department of Economics, University of Chicago); ;
    Abstract: Competition among multi-store chains is common in the retail industry. This paper proposes a general model of strategic store network choices by two chains. Unlike previous work on store network choice, it allows chains to choose not only which markets to open its stores but also how many stores to open in a market, internalizing the effects among their own stores on profits. To deal with the huge number of possible combinations of strategy profiles in their network choices, I exploit the lattice structure of the game. I show that a chain's trade-off between costs and benefits from clustering their stores in a market (within-market effect) can be either positive or negative to ensure existence of an equilibrium, thereby providing a way to freely estimate the effect from data. I apply the technique to market-level data from the convenience store industry in Okinawa, Japan. Integrating the model with revenue allows welfare interpretation of results. I find that the within-market effect is negative and as large as the business stealing effect, reduction in revenues due to presence of a rival chain store. The estimated structural model allows us to perform policy analysis. In particular, this paper considers how significantly the zoning regulation introduced in Japan in 1968 affects chains' store network choices. A counterfactual experiment of eliminating the current zoning regulation shows that in the new equilibrium chains would increase the number of their stores. Total surplus is also expected to increase, due to increase in aggregate sales and aggregate profits. The impacts of a hypothetical horizontal merger among two chains on product variety measured by the number of stores and economic welfare are also evaluated.
    Keywords: entry; retail location; supermodular game; zoning regulation; merger
    JEL: L13 L81 R52
    Date: 2008–10

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