nep-net New Economics Papers
on Network Economics
Issue of 2009‒12‒19
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Networks with decreasing returns to linking By Filippo Vergara Caffarelli
  2. Mobile network interconnection and investments By Veith, Tobias
  3. Networks and Markets: The dynamic impacts of information, matching and transaction costs on global trade By Yuki Kumagai
  4. Convexity and Complementarity in Network Formation: Implications for the Structure of Pairwise Stable Networks By Tim Hellmann
  5. Social Networks By De Martí, Joan; Zenou, Yves
  6. Two-way Flow Networks with Small Decay By Kris De Jaegher; Jurjen Kamphorst

  1. By: Filippo Vergara Caffarelli (Bank of Italy JEL classification: C72, D83, D85)
    Abstract: This paper presents a model of non-cooperative network formation in which the marginal benefit of new links eventually decreases. Agents link with each other to gain information and update their links according to better-reply dynamics. In the long run the system settles to a unique network architecture that consists of a constellation of starred wheels. This is reminiscent of some real-world features. Collections of smaller disjoint networks connecting only a few agents are more common than global networks connecting all the agents in a community. Differences within a connected component such as the centre and the periphery are established.
    Keywords: networks, coordination, learning dynamics, non-cooperative games
    Date: 2009–11
  2. By: Veith, Tobias
    Abstract: Abstract In markets with competing interconnected networks like mobile telecommunication markets investments affect the investor’s and also any competitors’ profits. In a theoretical model it is shown that cost-reducing investments reduce the investor’s termination rates and increase competitors’ termination rates under the callingparty- network-pays regime. Moreover, investments increase off-net traffic from the investor’s network but also from competitors’ networks. Regulation changes the effect on competitors’ termination rates but all other effects remain the same or are strengthened. Empirical results support the theoretical findings concerning the investor’s termination rates and the findings on off-net traffic. Competitors’ termination rates decrease. The negative termination rate effect even outweighs the quantity effect in the competitors’ profit functions. Testing for a common regulation-investment effect provides evidence that the negative investment externality is not due to regulation. --
    Keywords: regulation,mobile telecommunications,investments,interconnection
    JEL: L51 L52 L86 L96 O31 O33
    Date: 2009
  3. By: Yuki Kumagai (University of Nottingham)
    Abstract: The purpose of this paper is to explore strategic incentives to use trade networks rather than markets and to shed light on the dynamic relations between two distinct trading systems: a formal system of markets and a decentralised system of networks. We investigate the issues by mainly focusing on the role of matching in a trade network. The existing literature emphasises the importance of information transmission in achieving efficiency in repeated personal transactions under perfect observability. By contrast, we show that a folk theorem may hold if we change the way traders are matched, without introducing any information sharing. We also examine different stages of an evolution of trading system. The study states conditions under which agents prefer to trade on networks rather than in markets.
    Keywords: Trade networks; Repeated games; Matching; Uncertainty; Transaction costs; Institutional dynamics
    JEL: F10 C73 D01
    Date: 2009–11
  4. By: Tim Hellmann (Institute of Mathematical Economics, Bielefeld University)
    Abstract: This paper studies the properties of convexity (concavity) and strategic complements (substitutes) in network formation and the implications for the structure of pairwise stable networks. First, different definitions of convexity (concavity) in own links from the literature are put into the context of diminishing marginal utility of own links. Second, it is shown that there always exists a pairwise stable network as long as the utility function of each player satisfies convexity in own links and strategic complements. For network societies with a profile of utility functions satisfying concavity in own links and strategic complements, a local uniqueness property of pairwise stable networks is derived. The results do neither require any specification on the utility function nor any other additional assumptions such as homogeneity.
    Keywords: Networks, Network Formation, Game Theory, Supermodularity, Increasing Differences, Stability, Existence, Uniqueness
    JEL: D85 C72 L14
    Date: 2009–11
  5. By: De Martí, Joan; Zenou, Yves
    Abstract: We survey the literature on social networks by putting together the economics, sociological and physics/applied mathematics approaches, showing their similarities and differences. We expose, in particular, the two main ways of modeling network formation. While the physics/applied mathematics approach is capable of reproducing most observed networks, it does not explain why they emerge. On the contrary, the economics approach is very precise in explaining why networks emerge but does a poor job in matching real-world networks. We also analyze behaviors on networks, which take networks as given and focus on the impact of their structure on individuals’ outcomes. Using a game-theoretical framework, we then compare the results with those obtained in sociology.
    Keywords: centrality measures; game theory; network formation; random graph; weak and strong ties.
    JEL: A14 C72 D85 Z13
    Date: 2009–12
  6. By: Kris De Jaegher; Jurjen Kamphorst
    Abstract: The set of equilibrium networks in the two-way flow model of network formation (Bala and Goyal, 2000) is very sensitive to the introduction of decay. Even if decay is small enough so that equilibrium networks are minimal, the set of equilibrium architectures becomes much richer, especially when the benefit functions are nonlinear. However, not much is known about these architectures. In this paper we remedy this gap in the literature. We characterize the equilibrium architectures. Moreover, we show results on the relative stability of different types of architectures. Three of the results are that (i) at most one players receives multiple links, (ii) the absolute diameter of equilibrium networks can be arbitrarily large, and (iii) large (small) diameter networks are relatively stable under concave (convex) benefit functions.
    Keywords: Network formation, two-way flow model, decay, non-linear benefits
    JEL: C72 D85
    Date: 2009–11

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