nep-net New Economics Papers
on Network Economics
Issue of 2009‒01‒10
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Product innovation and firm survival in a network industry By Fumiko Hayashi; Zhu Wang
  2. The economics of two-sided payment card markets: pricing, adoption and usage By James McAndrews; Zhu Wang
  3. Firm dynamic governance of global innovation by means of flexible networks of connections By Gay, Brigitte
  4. Evaluating the impact of social networks in rural innovation systems: An overview By Matuschke, Ira
  5. Who is relevant? Exploring fertility relevant social networks By Sylvia Keim; Andreas Klärner; Laura Bernardi
  6. The von Neumann entropy of networks By Passerini, Filippo; Severini, Simone
  7. Why do card issuers charge proportional fees? By Oz Shy; Zhu Wang

  1. By: Fumiko Hayashi; Zhu Wang
    Abstract: This paper studies product innovation and firm survival in the U.S. ATM/debit card industry. The industry started with a few shared ATM networks in the early 1970s. The number of networks grew quickly up until the mid 1980s, but then declined sharply. We construct a theoretical model based on Jovanovic and MacDonald (1994). In contrast to their model focusing on cost-saving technological innovation, our model shows a major product innovation may also trigger the shakeout. The theoretical predictions are tested using a novel dataset on network entry, exit, size, location, ownership and product choices. The findings suggest introducing the point of sale debit function in the mid 1980s played an important role driving the network consolidation. Unlike previous studies, we find little advantage of being early industry entrants. Rather, due to network effects in the industry, large networks had better chance to adopt the product innovation and survive the shakeout.
    Date: 2008
  2. By: James McAndrews; Zhu Wang
    Abstract: This paper provides a new theory for two-sided payment card markets by positing better microfoundations. Adopting payment cards by consumers and merchants requires a fixed cost, but yields lower marginal costs of making payments. Considering this together with the heterogeneity of consumer income and merchant size, our theory derives card adoption and usage pattern consistent with cross-section and time-series evidence. Our analyses also help explain the observed card pricing pattern, particularly the rising merchant (interchange) fees over time. This is because a private card network, besides internalizing the two-sided market externality, has the incentive to inflate the card transaction value. We show that privately determined card pricing, adoption and usage tend to deviate from the social optimum, and imposing a ceiling on interchange fees may improve consumer welfare.
    Date: 2008
  3. By: Gay, Brigitte
    Abstract: Today a plethora of inter-company alliances exists. Firms have networked value chains, disclosing consequently their strategy, which assets are internalized or externalized, and their ability to cope with fast change. The picture of all interfirm alliances in high tech sectors is that of an unstable complex network, or macrostructure, that evolves quickly and into which firms are differently entwined. Structural metrics borrowed from network research in sociology such as centrality and constraint (or lack of “structural holes”) can be used to assess dynamically a firm’s position in the macro structure and therefore the market: does the firm occupy a dominant or dominated position in an industry? How do its partners and competitors perform? Drawing also from recent theories on complex networks developed by statistical physicists, we show that firms are embedded in dynamic complex networks that have a ‘scale-free’ format, with only a few firms or “hubs” controlling the system, as well as a cohesive or ‘small-world’ structure. This small-world structure, which allows rapid diffusion of innovation along very short paths, also constrains firms continuously and can lead to a fast reversal of their position on the market. Taking as an example a major sector of the biopharmaceutical industry, this study offers insights for managers to assess effectively their environment and navigate under constant pressure within these ever-changing networks.
    Keywords: Innovation; alliances; structural holes; centrality; complex networks; small world
    JEL: L65 L14 L24 O3
    Date: 2008–07
  4. By: Matuschke, Ira
    Abstract: "In light of an increasing focus on new demand-driven extension approaches that aim at accelerating the adoption of innovative technologies by smallholder farmers in developing countries, greater analysis is needed of the role of rural social networks and their impact on technology adoption. This paper contributes to this topic by reviewing selected studies on rural social networks and by outlining a research approach that combines social network analysis with econometric estimation techniques in one coherent framework to strengthen the study of technology adoption by smallholders. If applied, such a framework could help establish which network characteristics have the greatest impact on technology uptake, thereby lending support to and improving the design of new extension approaches." from authors' abstract
    Keywords: Social network analysis, econometric modeling, adoption of innovations, farmer-to-farmer knowledge transfer,
    Date: 2008
  5. By: Sylvia Keim (Max Planck Institute for Demographic Research, Rostock, Germany); Andreas Klärner (Max Planck Institute for Demographic Research, Rostock, Germany); Laura Bernardi (Max Planck Institute for Demographic Research, Rostock, Germany)
    Abstract: Based on the analysis of qualitative interviews in western Germany we argue that social relationships have a strong impact on individuals´ and couples´ fertility intentions and behavior. We identify relevant others and mechanisms of influences. The core family is an important factor of influences but we are also able to show that social relationships beyond the core family of parents and siblings need to be considered when taking social influence on the family formation of individuals into account.
    Keywords: Germany, fertility, influence, social network
    JEL: J1 Z0
    Date: 2009–01
  6. By: Passerini, Filippo; Severini, Simone
    Abstract: We normalize the combinatorial Laplacian of a graph by the degree sum, look at its eigenvalues as a probability distribution and then study its Shannon entropy. Equivalently, we represent a graph with a quantum mechanical state and study its von Neumann entropy. At the graph-theoretic level, this quantity may be interpreted as a measure of regularity; it tends to be larger in relation to the number of connected components, long paths and nontrivial symmetries. When the set of vertices is asymptotically large, we prove that regular graphs and the complete graph have equal entropy, and specifically it turns out to be maximum. On the other hand, when the number of edges is fixed, graphs with large cliques appear to minimize the entropy.
    Keywords: Networks
    JEL: C02
    Date: 2008–12–14
  7. By: Oz Shy; Zhu Wang
    Abstract: This paper explains why payment card companies charge consumers and merchants fees which are proportional to the transaction values instead of charging a fixed per-transaction fee. Our theory shows that, even in the absence of any cost considerations, card companies earn much higher profit when they charge proportional fees. It is also shown that competition among merchants reduces card companies? gains from using proportional fees relative to a fixed per-transaction fee. Merchants are found to be the losers from proportional fees whereas consumer and social welfare are invariant with respect to the two types of fees.
    Date: 2008

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