nep-net New Economics Papers
on Network Economics
Issue of 2010‒01‒30
eleven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. What drives the network’s growth? An agent-based study of the payment card market. By Biliana Alexandrova-Kabadjova; José Luis Negrín
  2. Experimental evidence for the interplay between individual wealth and transaction network By Jie-Jun Tseng; Sai-Ping Li; Sun-Chong Wang
  3. Regulating two-sided markets: an empirical investigation. By Santiago Carbó-Valverde; Sujit Chakravorti; Francisco Rodríguez Fernández
  4. Credit card interchange fees. By Jean-Charles Rochet; Julian Wright
  5. Regions as Networks: Towards a Conceptual Framework of Territorial Dynamics By Carlos Brito; Ricardo Correia
  6. Choosing and using payment instruments: evidence from German microdata. By Ulf von Kalckreuth; Tobias Schmidt; Helmut Stix
  7. Intercarrier Compensation in Unilateral and Bilateral Arrangements By Ruzana Davoyan; Jorn Altmann; Wolfgang Effelsberg
  8. A P2P File Sharing Network Topology Formation Algorithm Based on Social Network Information By Jorn Altmann; Zelalem Berhanu Bedane
  9. Pricing payment cards. By Özlem Bedre-Defolie; Emilio Calvano
  10. SEPA, efficiency, and payment card competition. By Wilko Bolt; Heiko Schmiedel
  11. Información y persuasión en los mercados financieros By Estrada, Fernando

  1. By: Biliana Alexandrova-Kabadjova (Bank of Mexico, Avenida 5 de Mayo No.6, Colonia Centro, Delegación Cuauhtémoc, 06059 Distrito Federal, Mexico City, Mexico.); José Luis Negrín (Bank of Mexico, Avenida 5 de Mayo No.2, Colonia Centro, Delegación Cuauhtémoc, 06059 Distrito Federal, Mexico City, Mexico.)
    Abstract: This paper investigates the impact on the network growth of the level of merchant discount, the level of Multilateral Interchange Fee (MIF), and the consumers' and the merchants' awareness of positive network effects. In an artificial market, in which issuers and acquirers belong to the same network, we simulate explicitly the interactions among consumers and merchants at the point of sale. We allow card issuers to charge fixed fees and provide net benefits from card usage, whereas acquirers could charge fixed and transactional fee. End users have homogeneous convenience benefits and are able to internalize network effects, because to a certain degree consumers are aware of the existence of merchants accepting cards and merchants are aware of the existence of consumers having cards. The MIF ows from acquirers to issuers. We assume there is a maximum level of merchants' discount MD' (reservation price) that the retailers are willing to pay, depending on the level of convenience benefits they receive. We study the case of imperfect competition, in which some acquirers charge a merchants' discount (MD) higher than MD', whereas other acquirers charge a MD lower than MD'. We found that in the case, in which consumers' and merchants' awareness is high, retailers face stronger externalities arriving from the set of cardholders that enjoy transactional benefits and the set of merchants that accept cards by paying lower transactional fees. In this conditions retailers could be obliged to pay variable fees higher than MD'. JEL Classification: G20, G28, C63.
    Keywords: card payment systems; interchange fees; agent-based modelling.
    Date: 2009–12
  2. By: Jie-Jun Tseng; Sai-Ping Li; Sun-Chong Wang
    Abstract: We conduct a market experiment with human agents in order to explore the structure of transaction networks and to study the dynamics of wealth accumulation. The experiment is carried out on our platform for 97 days with 2,095 effective participants and 16,936 times of transactions. From these data, the hybrid distribution (log-normal bulk and power-law tail) in the wealth is observed and we demonstrate that the transaction networks in our market are always scale-free and disassortative even for those with the size of the order of few hundred. We further discover that the individual wealth is correlated with its degree by a power-law function which allows us to relate the exponent of the transaction network degree distribution to the Pareto index in wealth distribution.
    Date: 2010–01
  3. By: Santiago Carbó-Valverde (University of Granada, Department of Economic Theory and History, Campus Universitario de Cartuja s/n, E-18071 Granada, Spain.); Sujit Chakravorti (Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413, United States.); Francisco Rodríguez Fernández (University of Granada, Department of Economic Theory and History, Campus Universitario de Cartuja s/n, E-18071 Granada, Spain.)
    Abstract: We study the effect of government encouraged or mandated interchange fee ceilings on consumer and merchant adoption and usage of payment cards in an economy where card acceptance is far from complete. We believe that we are the first to use bank-level data to study the impact of interchange fee regulation. We find that consumer and merchant welfare improved because of increased consumer and merchant adoption leading to greater usage of payment cards. We also find that bank revenues increased when interchange fees were reduced although these results are critically dependent on merchant acceptance being far from complete at the beginning and during the implementation of interchange fee ceilings. In addition, there is most likely a threshold interchange fee below which social welfare decreases although our data currently does not allow us to quantify it. JEL Classification: L11, G21, D53.
    Keywords: consumer payment choice; merchant payment adoption; network competition.
    Date: 2009–12
  4. By: Jean-Charles Rochet (Toulouse School of Economics, Manufacture de Tabacs, 21 allées de Brienne - 31000 Toulouse, France.); Julian Wright (Department of Economics, National University of Singapore, 21 Lower Kent Ridge Road, Singapore 119077.)
    Abstract: We build a model of credit card pricing that explicitly takes into account credit functionality. We show that a monopoly card network always selects an interchange fee that exceeds the level that maximizes consumer surplus. If regulators only care about consumer surplus, a conservative regulatory approach is to cap interchange fees based on retailers’ net avoided costs from not having to provide credit themselves. In the model, this always raises consumer surplus compared to the unregulated outcome, sometimes to the point of maximizing consumer surplus.
    Date: 2009–12
  5. By: Carlos Brito (Faculdade de Economia, Universidade do Porto); Ricardo Correia (Escola Superior de Comunicação Administração e Turismo – Instituto Politécnico de Bragança)
    Abstract: Regions interact with multiple actors and industrial companies are one of the most important players in this interaction. By their strategic actions and relationships, companies are simultaneously present in different regions and influence a territory’s dynamics and structure. Moreover, territorial characteristics are also a condition that can shape a company’s action. This reciprocal influence is recognized by an emerging theoretical background of relational geography. Within the industrial network approach interest in this phenomenon is also increasing. However, the interactions between companies and regions have not been sufficiently explained. Thus, the main objective of this working paper is to produce new knowledge about the dynamics and interactions between regions and industrial networks. More precisely, the authors want to explain how companies’ strategic action is reflected in territorial dynamics and structure and how such factors affect the companies’ strategic action. Based on extensive research of the interactive relations between companies and regions, a model aimed at providing a better understanding of this mutual influence was developed.
    Keywords: industrial networks, relationships, territory, regional development
    JEL: R19
    Date: 2010–01
  6. By: Ulf von Kalckreuth (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, D-60431 Frankfurt am Main, Germany.); Tobias Schmidt (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, D-60431 Frankfurt am Main, Germany.); Helmut Stix (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, 1090 Vienna, Austria.)
    Abstract: Germans are still very fond of using cash. Of all direct payment transactions, cash accounts for an astounding 82% in terms of number, and for 58% in terms of value. With a new and unique dataset that combines transaction information with survey data on payment behaviour of German consumers, we shed light on how individuals choose payment instruments and why cash remains so important. We propose a two-stage empirical framework which jointly explains credit card ownership and the use of cash. Our results indicate that the pattern of cash usage is compatible with systematic economic decision making. Consumers decide upon the adoption of payment cards and then use available payment media according to their transaction and personal characteristics, the relative costs of cash and card usage, and their assessment of payment instruments’ characteristics. Whereas older consumers use significantly more cash, the comparison with younger consumers shows that the difference in payment behaviour is not explained by age as such but to a large extent by differences in the characteristics of these two groups. It is interesting that the possession of a credit card, especially alongside a debit card, does not significantly affect the use of cash in Germany. JEL Classification: E41, E58, D12.
    Keywords: Payment instruments; payment cards; payment behaviour; payment innovation; cash usage; cash substitution; debit cards; credit cards; survey data.
    Date: 2009–12
  7. By: Ruzana Davoyan; Jorn Altmann; Wolfgang Effelsberg (Department of Mathematics and Computer Science, University of Mannheim)
    Abstract: In terms of intercarrier compensation traffic flows are measured to allocate the costs between networks. This method provides a poor basis for sharing any costs. In this work we analyze the benefits of the traffic differentiation on the interconnection charges in unilateral and bilateral arrangements. We determine an original initiator of a transmission and compensate differently for the distinguished traffic flows. The presented approach was compared with the existing solutions, which perform cost compensation based on the traffic flows.
    Keywords: interconnection arrangements, intercarrier compensation, Internet economics
    JEL: C61 C62 D40 D45 D86 L14 L86 L96 M21
    Date: 2010–01
  8. By: Jorn Altmann; Zelalem Berhanu Bedane (TEMEP, School of Industrial and Management Engineering College of Engineering, Seoul National University)
    Abstract: This paper applies the theory of social networks to P2P systems, creating a social-network-based P2P network topology formation algorithm for file sharing. The algorithm extends the Gnutella P2P file sharing technology, which uses super nodes for searching and for relaying shared files between network leafs that are located behind Firewalls/NATs. The topology of the P2P network is based on the actual social relationship between peers (users). The idea is that users are willing to contribute their resources to a P2P network if they know that their resources directly benefit their friends and family. Following this approach, free-riding in P2P networks will be avoided by not providing better-than-basic service if peers do not reveal their social relationships. Within the paper, we simulate the proposed topology formation algorithm, considering the real characteristics of the Gnutella P2P network and realistic network topologies. The simulation shows the effectiveness of the topology formation algorithm and the high utility of nodes under this new file sharing scheme.
    Keywords: social network analysis, peer-to-peer, economics, network science, free- riding, file sharing, sociology, NATs, utility, Gnutella, Firewalls, network economics, incentive mechanisms
    JEL: C13 C14 C61 C62 C63 D01 D02 D82 D85 L96 L96 M21
    Date: 2010–01
  9. By: Özlem Bedre-Defolie (Toulouse School of Economics, Manufacture de Tabacs, 21 allées de Brienne – 31000 Toulouse, France.); Emilio Calvano (Department of Economics, Harvard University, Littauer Center, 1805 Cambridge Street, Cambridge, MA 02138, U.S.A)
    Abstract: In a payment card association such as Visa, each time a consumer pays by card, the bank of the merchant (acquirer) pays an interchange fee (IF) to the bank of the cardholder (issuer) to carry out the transaction. This paper studies the determinants of socially and privately optimal IFs in a card scheme where services are provided by a monopoly issuer and perfectly competitive acquirers to heterogeneous consumers and merchants. Different from the literature, we distinguish card membership from card usage decisions (and fees). In doing so, we reveal the implications of an asymmetry between consumers and merchants: the card usage decision at a point of sale is delegated to cardholders since merchants are not allowed to turn down cards once they are affiliated with a card network. We show that this asymmetry is sufficient to induce the card association to set a higher IF than the socially optimal IF, and thus to distort the structure of user fees by leading to too low card usage fees at the expense of too high merchant fees. Hence, cap regulations on IFs can improve the welfare. These qualitative results are robust to imperfect issuer competition, imperfect acquirer competition, and to other factors affecting final demands, such as elastic consumer participation or strategic card acceptance to attract consumers. JEL Classification: G21; L11; L42; L31; L51; K21.
    Keywords: Payment card associations; Interchange fees; Merchant fees.
    Date: 2009–12
  10. By: Wilko Bolt (De Nederlandsche Bank, Research Department, Postbus 98, 1000 AB Amsterdam, The Netherlands.); Heiko Schmiedel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyzes the welfare implications of creating a Single Euro Payments Area. We study the e®ects of increased network compatibility and payment scale economies on consumer and merchant card fees and its impact on card usage. In particular, we model competition among debit cards and between debit and credit cards. We show that competitive pressures dampen merchant fees and increase total card acceptance. The paper argues that there is room for multilateral interchange fee arrangements to achieve optimal consumer and merchant fees, taking safety, income uncertainty, default risk, merchant's pricing power, and the avoided cost of cash at the retailers side into account. Consumers and merchants are likely to benefit the most from the creation of SEPA when sufficient payment card competition alleviates potential monopolistic tendencies. JEL Classification: L11; G21; D53.
    Keywords: SEPA; card network competition; optimal pricing; economic welfare.
    Date: 2009–12
  11. By: Estrada, Fernando
    Abstract: This paper aims to defend the importance of the information and persuasion in financial markets. The conviction relates to the developments of Argumentation Theory (AT). Understand that economic agents react according to the information they have, and that beliefs play an important role because it motivates the decisions to be made in certain circumstances. This paper is the first part will be illustrated in a second installment to the study of specific cases.
    Keywords: Economics of Networks; Neuroeconomics; Behavioral & Experimental Finance; Real Estate; Risk Management
    JEL: D11 D84 C71 D82 C72
    Date: 2010–01–19

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