nep-net New Economics Papers
on Network Economics
Issue of 2008‒10‒28
ten papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Microstructure of Collaboration: The Network of Open Source Software By Chaim Fershtman; Neil Gandal
  2. Network Externalities, Mutuality, and Compatibility By Matthew G. Nagler
  3. Intense Network Competition By Johan Stennek; Thomas TangerŒs
  4. Modeling the Product Space as a Network By Nitesh V Chawla
  5. Platform Rules: Multi-Sided Platforms as Regulators By Kevin J. Boudreau; Andrei Hagiu
  6. Market Dominance and Barriers to Competition in Financial Trading Venues By Ricardo Ribeiro
  7. Competition, bargaining power and pricing in two-sided markets By Wilko Bolt; Kimmo Soramäki
  8. Informational Hold-Up, Disclosure Policy, and Career Concerns on the Example of Open Source Software Development By Marc Blatter; Andras Niedermayer
  9. Firms' contribution to open source software and the dominant skilled user By Nicolas Jullien; Jean-Benoît Zimmermann
  10. Leadership in Collective Action By Joan Esteban; Esther Hauk

  1. By: Chaim Fershtman (Department of Economics, Tel Aviv University,); Neil Gandal (Department of Public Policy, Tel Aviv University)
    Abstract: The open source model is a form of software development with source code that is typically made available to all interested parties. At the core of this process is a decentralized production process: open source software development is done by a network of unpaid software developers. Using data from, the largest repository of Open Source Software (OSS) projects and contributors on the Internet, we construct two related networks: A Project network and a Contributor network. Knowledge spillovers may be closely related to the structure of such networks, since contributors who work on several projects likely exchange information and knowledge. Defining the number of downloads as output we finds that (i) additional contributors are associated with an increase in output, but that additional contributors to projects in the giant component are associated with greater output gains than additional contributors to projects outside of the giant component; (ii) Betweenness centrality of the project is positively associated with the number of downloads. (iii) Closeness centrality of the project appears also to be positively associated with downloads, but the effect is not statistically significant over all specifications. (iv) Controlling for the correlation between these two measures of centrality (betweenness and closeness), the degree is not positively associated with the number of downloads. (v) The average closeness centrality of the contributors that participated in a project is positively correlated with the success of the project. These results suggest that there are positive spillovers of knowledge for projects occupying critical junctures in the information flow. When we define projects as connected if and only if they had at least two contributors in common, we again find that additional contributors are associated with an increase in output, and again find that this increase is much higher for projects with strong ties than other projects in the giant component.
    Keywords: open source, network, Microstructure of Collaboration
    JEL: L17
    Date: 2008–04
  2. By: Matthew G. Nagler (The City College of New York)
    Abstract: Positive network externalities can arise when consumers benefit from the consumption of compatible products by other consumers (user-positive consumption externalities) or, alternatively, when they incur costs from the consumption of incompatible products by other consumers (nonuser-negative consumption externalities). But whereas user-positive externalities are typically mutually imposed and imply mutual benefit because they relate to interoperability, with nonuser-negative externalities the costs of incompatibility may be imposed unilaterally and borne asymmetrically. For example, increased risks of death and injury on the roads due to the co-existence of large and small vehicles are imposed exclusively by the owners of the large vehicles and borne exclusively by the occupants of the small vehicles. This paper compares the social optimality of incentives for compatibility under regimes involving user-positive and nonuser-negative externalities. Earlier work with respect to user-positive externalities (e.g., Katz and Shapiro, 1985) suggests that firms with relatively small networks or weak reputations tend to be biased in favor of compatibility, while individual firms’ incentives for compatibility are suboptimal when their networks are closely matched in size. Meanwhile, intuition suggests that with nonuser-negative externalities incentives for incompatibility should always be excessive, reflecting the notion that activities involving unilaterally imposed negative externalities will always be overprovided by the market (in the absence of regulation or Coaseian mitigation). Using a “location” model of differentiated products, we find that, under both regimes, incentives for compatibility tend to be suboptimal when firms’ networks are close in size, and excessive for the small firm when the networks differ greatly in size. Surprising public policy implications with respect to externalities are discussed.
    Keywords: network effects, negative externalities, differentiated products, competition, welfare
    JEL: L13 L14 D62 D11
    Date: 2008–10
  3. By: Johan Stennek (Gothenburg University); Thomas TangerŒs (Research Institute of Industrial Economics)
    Abstract: First, we demonstrate how unregulated price setting in mobile telecommunications may lead to monopolization, even when networks are highly substitutable. Second, we demonstrate that a menu of structural rules, including (i) mandatory interconnection, (ii) reciprocal access prices and (iii) a ban on price discrimination of calls to other networks, may restore competition. This regulation requires neither demand data nor information about call costs.
    Keywords: network competition; two-way access; mobile termination rates; network substitutability; entry deterrence
    JEL: L12 L14 L51 L96
    Date: 2008–09
  4. By: Nitesh V Chawla (Department of Computer Science and Engineering, University of Notre Dame)
    Abstract: In the market basket setting, we are given a series of transactions each composed of one or more items and the goal is to find relationships between items, usually sets of items that tend to occur in the same transaction. Association rules, a popular approach for mining such data, are limited in the ability to express complex interactions between items. Our work defines some of these limitations and addresses them by modeling the set of transactions as a network. We develop both a general methodology for analyzing networks of products, and a privacy-preserving protocol such that product network information can be securely shared among stores. In general, our network based view of transactional data is able to infer relationships that are more expressive and expansive than those produced by a typical association rules analysis.
    Keywords: association rules, product networks, privacy protocol
    Date: 2008–09
  5. By: Kevin J. Boudreau (HEC – Paris School of Management); Andrei Hagiu (Harvard Business School, Strategy Unit)
    Abstract: This paper provides a basic conceptual framework for interpreting non-price instruments used by multi-sided platforms (MSPs) by analogizing MSPs as "private regulators" who regulate access to and interactions around the platform. We present evidence on Facebook, TopCoder, Roppongi Hills and Harvard Business School to document the "regulatory" role played by MSPs. We find MSPs use nuanced combinations of legal, technological, informational and other instruments (including price-setting) to implement desired outcomes. Non-price instruments were very much at the core of MSP strategies.
    Keywords: Platforms, regulation, network effects, distributed innovation
    Date: 2008–10
  6. By: Ricardo Ribeiro (STICERD, The London School of Economics and Political Science)
    Abstract: The Market in Financial Instruments Directive (MiFID) aims to increase competition and to foster client protection in the European financial market. Among other provisions, it abolishes the concentration rule and challenges the market power of existing trading venues. The directive introduces venue competition in order to achieve better execution and ultimately lower trading costs. In this paper I address the question of whether fostering competition between alternative trading venues alone may or not be able to impact actual competition in the market. I consider two reasons for why it may not: direct network effects together with increasing returns to scale, and post-trading constraints. In particular, I (a) evaluate the actual degree of competition between trading venues, (b) measure the impact of network effects on competition, and lastly (c) assess the barriers to competition induced by post-trading constraints. The results imply that financial intermediaries tend to value liquidity more (than total fees) when deciding where to route a given order for execution - implying that being the incumbent venue translates into a competitive advantage. Furthermore, eliminating the mentioned barriers to competition seems to be associated with a significant decrease (of a similar magnitude) in the asymmetry of the industry.
    Keywords: Market Dominance, Network Effects, Financial Trading, Demand, Barriers to Competition
    JEL: C13 G10 L11 L84
    Date: 2008–10
  7. By: Wilko Bolt; Kimmo Soramäki
    Abstract: We develop a model of two-sided markets that illustrates the role of bargaining power between the two sides of the market. We are interested in the profit maximizing usage fees set by identical duopolistic platforms which engage in homogeneous, Bertrand-type competition. We find that for a sufficiently low marginal cost duopolistic two-sided competition reduces to a “grab-the-dollar” game with two asymmetric (pure) Nash equilibria. These equilibria are characterized by highly skewed prices, in which the side with all the bargaining power pays a minimum price. The other side of the market is used for cross-subsidization and is charged a high price. Compared to the monopoly outcome, competition lowers the total price charged to both sides, although the seller's equilibrium price may exceed the monopoly price. Both platforms enjoy excess profits.Key Words: platform competition, bargaining power, asymmetric equilibria, skewed pricing
    Keywords: platform competition; bargaining power; asymmetric equilibria; skewed pricing
    JEL: E24 E52 J50
    Date: 2008–09
  8. By: Marc Blatter (Economics Department, University of Bern); Andras Niedermayer (Kellogg School of Management, CMS-EMS, Northwestern University)
    Abstract: We consider software developers who can either work on an open source project or on a closed source project. The former provides a publicly available signal about their talent, whereas the latter provides a signal only observed by their employer. We show that a talented employee may initially prefer a less paying job as an open source developer to commercial closed source projects, because a publicly available signal gives him a better bargaining position when renegotiating wages with his employer after the signal has been revealed. Also, we derive conditions under which two effects suggested by standard intuition are reversed: a “pooling equilibrium” (with both talented and untalented workers doing closed source) is less likely if differences in talent are large; a highly visible open source job leads to more effort in a career concerns setup. The former effect is because a higher productivity of talented workers raises not only the value but also the cost of signaling; the latter stems from more effort and the choice of a high visibility job being substitutes for the purpose of signaling. Results naturally apply to other industries with high and low visibility jobs, e.g. academic rather than commercial research, consulting rather than management.
    Keywords: Open source software, signaling
    JEL: C70 L86
    Date: 2008–09
  9. By: Nicolas Jullien (Marsouin - Telecom Bretagne); Jean-Benoît Zimmermann (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: : Free/libre or open-source software (FLOSS) is nowadays produced not only by individual benevolent developers but, in a growing proportion, by firms that hire programmers for their own objectives of development in open source or for contributing to open-source projects in the context of dedicated communities. A recent literature has focused on the question of the business models explaining how and why firms may draw benefits from such involvement and their connected activities. They can be considered as the building blocks of a new modus operandi of an industry, built on an alternative approach to intellectual property management. Its prospects will depend on both the firms' willingness to rally and its ability to compete with the traditional “proprietary” approach. As a matter of fact, firms' involvement in FLOSS, while growing, remains very contrasting, depending on the nature of the products and the characteristics of the markets. The aim of this paper is to emphasize that, beside factors like the importance of software as a core competence of the firm, the role of users on the related markets - and more precisely their level of skills - may provide a major explanation of such diversity. We introduce the concept of the dominant skilled user and we set up a theoretical model to better understand how it may condition the nature and outcome of the competition between a FLOSS firm and a proprietary firm. We discuss these results in the light of empirical stylized facts drawn from the recent trends in the software industry
    Keywords: Software ; Open Source ; Intellectual Property ; Competition ; Users
    Date: 2008–10–20
  10. By: Joan Esteban; Esther Hauk
    Abstract: We extend the model of collective action in which groups compete for a budged by endogenizing the group platform, namely the specific mixture of public/private good and the distribution of the private good to group members which can be uniform or performance-based. While the group-optimal platform contains a degree of publicness that increases in group size and divides the private benefits uniformly, a success-maximizing leader uses incentives and distorts the platform towards more private benefits - a distortion that increases with group size. In both settings we obtain the anti-Olson type result that win probability increases with group size.
    Keywords: collective contests, leadership, group platform, incentives, sharing rules
    JEL: D70 D72 D74
    Date: 2008–10–13

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