nep-net New Economics Papers
on Network Economics
Issue of 2010‒02‒20
four papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Dynamic price competition with network effects By Cabral, Luis
  2. Consumption Risk-sharing in Social Networks By Attila Ambrus; Markus Mobius; Adam Szeidl
  3. Does the market kill bad ideas? An institutional comparision of committees and markets in network industries By Prabal Roy Choudhury; Debadatta Saha
  4. The Lehman Brothers Effect and Bankruptcy Cascades By Pawe{\l} Sieczka; Didier Sornette; Janusz A. Ho{\l}yst

  1. By: Cabral, Luis (IESE Business School)
    Abstract: I consider a dynamic model of competition between two proprietary networks. Consumers die and are replaced with a constant hazard rate; and firms compete for new consumers to join their network by offering network entry prices. I derive a series of results pertaining to: a) existence and uniqueness of symmetric equilibria, b) monotonicity of the pricing function (e.g., larger networks set higher prices), c) network size dynamics (increasing dominance vs. reversion to the mean), and d) firm value (how it varies with network effects). Finally, I apply my general framework to the study of termination charges in wireless telecommunications. I consider various forms of regulation and examine their impact on firm profits and market share dynamics.
    Keywords: Networks; dynamic competition; oligopoly competition; wireless telecommunications;
    Date: 2009–12–10
  2. By: Attila Ambrus; Markus Mobius; Adam Szeidl
    Abstract: We develop a model of informal risk-sharing in social networks, where relationships between individuals can be used as social collateral to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements and obtain two results. (1) The degree of informal insurance is governed by the expansiveness of the network, measured by the number of connections that groups of agents have with the rest of the community, relative to group size. Two-dimensional networks, where people have connections in multiple directions, are sufficiently expansive to allow very good risk-sharing. We show that social networks in Peruvian villages satisfy this dimensionality property; thus, our model can explain Townsend's (1994) puzzling observation that village communities often exhibit close to full insurance. (2) In second-best arrangements, agents organize in endogenous "risk-sharing islands" in the network, where shocks are shared fully within, but imperfectly across islands. As a result, network based risk-sharing is local: socially closer agents insure each other more.
    JEL: D02 D31 D70
    Date: 2010–02
  3. By: Prabal Roy Choudhury (Indian Statistical Institute, New Delhi); Debadatta Saha (Indian Statistical Institute, New Delhi)
    Abstract: The paper analyzes the problem of protocol coordination between two firms, where one firm has private information about its own protocol. The institutional characteristics of the market and the class of strategies adopted by the firms admit multiple equilibria in the market. Of these, one particular equilibrium has an interior information revelation cutoff for the firm with private information. This demonstrates that the market might not be able to "kill bad ideas", but it does "reward good ideas". In contrast, the institutional design of the committee ensures that the same class of strategies gives rise to a unique equilibrium in the committee, with the informed firm revealing all private information. The committee game results generalize easily to multiple periods as well as to multiple firms and is robust to an exit option. The market game result holds for a certain range of parameter values for multiple firms.
    Keywords: Networks, standardization, coordination, asymmetric information, institutional design
    JEL: L14 L15 D82 D02
    Date: 2009–06
  4. By: Pawe{\l} Sieczka; Didier Sornette; Janusz A. Ho{\l}yst
    Abstract: Inspired by the bankruptcy of Lehman Brothers and its consequences on the global financial system, we develop a simple model in which the Lehman default event is quantified as having an almost immediate effect in worsening the credit worthiness of all financial institutions in the economic network. In our stylized description, all properties of a given firm are captured by its effective credit rating, which follows a simple dynamics of co-evolution with the credit ratings of the other firms in our economic network. The existence of a global phase transition explains the large susceptibility of the system to negative shocks. We show that bailing out the first few defaulting firms does not solve the problem, but does have the effect of alleviating considerably the global shock, as measured by the fraction of firms that are not defaulting as a consequence. This beneficial effect is the counterpart of the large vulnerability of the system of coupled firms, which are both the direct consequences of the collective self-organized endogenous behaviors of the credit ratings of the firms in our economic network.
    Date: 2010–02

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