nep-net New Economics Papers
on Network Economics
Issue of 2010‒10‒09
ten papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Price Wars in Two-Sided Markets: The case of the UK Quality Newspapers By Timothy Keller; David Miller; Xiahua (Anny) Wei
  2. Asymmetric Interaction and Aggregate Incentives: a Note By Mohamed Belhaj; Frédéric Deroïan
  3. Identification of Social Interactions By Lawrence E. Blume; William A. Brock; Steven N. Durlauf; Yannis M. Ioannides
  4. When Does a Platform Create Value by Limiting Choice? By Ramon Casadesus-Masanell; Hanna Halaburda
  5. Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol By Scott K. Shriver
  6. The Attack and Defense of Weakest-Link Networks By Dan Kovenock; Brian Roberson; Roman M. Sheremeta
  7. Strategic Random Networks By Ben Golub; Yair Livne
  8. A Structural Model of Segregation in Social Networks By Angelo Mele
  9. Exclusive Content and the Next Generation Networks By Juan José Ganuza; María Fernanda Viecens
  10. Network Neutrality and Congestion Sensitive Content Providers: Implications for Service Innovation, Broadband Investment and Regulation By Jan Kraemer; Lukas Wiewiorra

  1. By: Timothy Keller (Department of Economics, University of California, San Diego); David Miller (Department of Economics, University of California, San Diego); Xiahua (Anny) Wei (Department of Economics, University of California, San Diego)
    Abstract: We study duopoly pricing in the market for mobile phone service, which features network externalities, switching costs, and consumer heterogeneity. We introduce a steady state approach that enables a tractable analysis without endgame effects. The model can generate a variety of testable predictions, of which we focus on the comparative statics with respect to switching costs. Using data on the mobile phone service industries in 52 countries, we use the variation in market structure at the time switching costs were suddenly reduced by the regulatory imposition of mobile number portability (MNP). Firms that grew more rapidly prior to MNP respond to MNP by pricing more aggressively; firms facing large competitors respond less aggressively. Exploration of the model and its implications is an object of ongoing research.
    Keywords: Oligopoly, network externalities, switching costs, mobile number portability.
    JEL: L13
    Date: 2010–09
  2. By: Mohamed Belhaj (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 (EHESS) - CNRS : UMR6579); Frédéric Deroïan (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 (EHESS) - CNRS : UMR6579)
    Abstract: We consider a model of interdependent efforts, with linear and possibly asymmetric interaction. We examine how a variation of the intensity of interaction affects aggregate effort. We show that the relevant information is given by the transposed system.
    Keywords: Asymmetric Interaction, Social Network, Aggregate Effort, Transposed System
    Date: 2010–09–22
  3. By: Lawrence E. Blume; William A. Brock; Steven N. Durlauf; Yannis M. Ioannides
    Abstract: While interest in social determinants of individual behavior has led to a rich theoretical literature and many efforts to measure these influences, a mature "social econometrics" has yet to emerge. This chapter provides a critical overview of the identification of social interactions. We consider linear and discrete choice models as well as social network structures. We also consider experimental and quasi-experimental methods. In addition to describing the state of the identification literature, we indicate areas where additional research is especially needed and suggest some directions that appear to be especially promising.
    Keywords: social interactions, social networks, identification
    JEL: C21 C23 C31 C35 C72 Z13
    Date: 2010
  4. By: Ramon Casadesus-Masanell (Harvard Business School); Hanna Halaburda (Harvard Business School)
    Abstract: We present a theory for why it might be rational for a platform to limit the number of applications available on it. Our model is based on the observation that even if users prefer application variety, applications often also exhibit direct network effects. When there are direct network effects, users prefer to consume the same applications to benefit from consumption complementarities. We show that the combination of preference for variety and consumption complementarities gives rise to (i) a commons problem (users have an incentive to consume more applications than the social optimum to better satisfy their preference for variety); (ii) an equilibrium selection problem (consumption complementarities often lead to multiple equilibria); and (iii) a coordination problem (lacking perfect foresight, it is unlikely that users will end up buying the same set of applications). The analysis shows that the platform can resolve these problems by limiting the number of applications available. By limiting choice, the platform may create new equilibria (including the socially efficient allocation), destroy Pareto-dominated equilibria, and reduce the severity of the coordination problem faced by users.
    Keywords: platform governance, direct network effects, indirect network effects, complements, tragedy of the commons, equilibrium selection, coordination, foresight.
    JEL: D21 D42 L12 L82 L86
    Date: 2010–09
  5. By: Scott K. Shriver (Stanford University Graduate School of Business)
    Abstract: This paper investigates the importance of network effects in the demand for ethanol-compatible vehicles and the supply of ethanol fuel retailers. An indirect network effect, or positive feedback loop, arises in this context due to spatially-dependent complementarities in the availability of ethanol fuel and the installed base of ethanol-compatible vehicles. Marketers and social planners are interested in whether these effects exist, and if so, how policy might accelerate adoption of the ethanol fuel standard within a targeted population. To measure these feedback effects, I develop an econometric framework that considers the simultaneous determination of ethanol-compatible vehicle demand and ethanol fuel supply in local markets. The demand-side of the model considers the automobile purchase decisions of consumers and fleet operators, and the supply-side model considers the ethanol market entry decisions of competing fuel retailers. I propose new estimators that address the endogeneity induced by the co-determination of alternative fuel vehicle demand and alternative fuel supply. I estimate the model using zip code level panel data from six states over a six year period. I find the network effect to be highly significant, both statistically and economically. Under typical market conditions, entry of an additional ethanol fuel retailer leads to a 12% increase in consumer demand for ethanol-compatible vehicles. The entry model estimates imply that a monopolist requires a local installed base of at least 204 ethanol-compatible vehicles to be profitable. As an application, I demonstrate how the model estimates can inform the promotional strategy of a vehicle manufacturer. Counterfactual simulations indicate that subsidizing fuel retailers to offer ethanol can be an effective policy to indirectly increase ethanol-compatible vehicle sales.
    Keywords: ethanol, flex-fuel vehicles, indirect network e¤ects, market entry
    JEL: C33 C73 D12 L11 L14 L91 M31 O32 Q21 Q42
    Date: 2010–10
  6. By: Dan Kovenock (Department of Economics, The University of Iowa); Brian Roberson (Department of Economics, Krannert School of Management, Purdue University); Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University)
    Abstract: This paper experimentally examines behavior in a two-player game of attack and defense of a weakest-link network of targets, in which the attacker's objective is to successfully attack at least one target and the defender's objective is diametrically opposed. We apply two benchmark contest success functions (CSFs): the auction CSF and the lottery CSF. Consistent with the theoretical prediction, under the auction CSF, attackers utilize a stochastic “guerilla warfare” strategy — in which a single random target is attacked — more than 80% of the time. Under the lottery CSF, attackers utilize the stochastic guerilla warfare strategy almost 45% of the time, contrary to the theoretical prediction of an equal allocation of forces across the targets.
    Keywords: Colonel Blotto, conflict resolution, weakest-link, best-shot, multi-dimensional resource allocation, experiments.
    JEL: C72 C91 D72 D74
    Date: 2010–09
  7. By: Ben Golub (Stanford Graduate School of Business); Yair Livne (Stanford Graduate School of Business)
    Abstract: To study how economic fundamentals affect the formation of social networks, a model is needed that (i) has agents responding rationally to incentives (ii) can be taken to the data. This paper combines game-theoretic and statistical approaches to network formation in order to develop such a model. Agents spend costly resources to socialize. Their effort levels determine the probabilities of relationships, which are valuable for their direct benefits and also because they lead to other relationships in a second stage of “meeting friends of friends”. The model predicts random graphs with tunable degree distributions and clustering, and characterizes how those statistics depend on the economic fundamentals. When the value of friends-of-friends is low, equilibrium networks can be either sparse or thick. But as soon as this value crosses a key threshold, the sparse equilibrium disappears completely and only densely connected networks are possible. This transition mitigates an extreme inefficiency.
    Keywords: network formation, random graphs, random networks, phase transition
    JEL: D85
    Date: 2010–09
  8. By: Angelo Mele (University of Illinois, Urbana-Champaign)
    Abstract: In this paper, I develop and estimate a dynamic model of strategic network formation with heterogeneous agents. The main theoretical result is the existence of a unique stationary equilibrium, which characterizes the probability of observing a specific network in the data. As a consequence, the structural parameters can be estimated using only one observation of the network at a single point in time. The estimation is challenging, since the exact evaluation of the likelihood function is computationally infeasible even for very small networks. To overcome this problem, I propose a Bayesian Markov Chain Monte Carlo algorithm that avoids the direct evaluation of the likelihood. This method drastically reduces the computational burden of estimating the posterior distribution and allows inference in high dimensional models. I present an application to the study of segregation in school friendship networks, using data from Add Health. The latter contains the actual social network of each student in a representative sample of US schools. My results suggest that for White students, the value of a same-race friend decreases with the fraction of whites in the school. This relationship is of opposite sign for African American students. The model is used to study how different desegregation policies may affect the structure of the network in equilibrium. I find an inverted U-shape relationship between the fraction of students belonging to a racial group and the expected equilibrium segregation levels. These results suggests that these policies should be carefully designed in order to be effective.
    Keywords: Social Networks, Bayesian Estimation, Markov Chain Monte Carlo
    JEL: D85 C15 C73
    Date: 2010–09
  9. By: Juan José Ganuza; María Fernanda Viecens
    Abstract: This paper analyzes the interaction between the market of premium contents and the next generation network industry. We assume structural separation between the network and service operators (platforms) and the comparative advantage of the service operators depends on the access to premium contents. On one side, we analyze the impact of the exclusivity of premium contents over the incentives to deploy NGNs, the performance of the operators market, and welfare. On the other side, we analyze what are the incentives of the providers of premium contents to offer exclusivity contracts (to singlehome) in NGNs settings in which they can also sell directly to consumers. In this context, we show that exclusivity only occurs when the content is not highly valued by consumers.
    Date: 2010–08
  10. By: Jan Kraemer (Karlsruhe Institute of Technology, Institute of Information Systems and Management); Lukas Wiewiorra (Karlsruhe Institute of Technology, Institute of Information Systems and Management)
    Abstract: We consider a two-sided market model with a monopolistic Internet Service Provider (ISP), network congestion sensitive content providers (CPs), and Internet customers in order to study the impact of Quality-of-Service (QoS) tiering on service innovation, broadband investments, and welfare in comparison to network neutrality. We find that QoS tiering is the more efficient regime in the short-run. However it does not promote entry by new, congestion sensitive CPs, because the ISP can expropriate much of the CPs' surplus. In the long-run, QoS tiering may lead to more or less broadband capacity and welfare, depending on the competition-elasticity of CPs' revenues.
    Keywords: Telecommunications, Net Neutrality, Quality of Service, Innovation, Investment, Regulation
    JEL: D42 L12 L43 L51 L52 L96
    Date: 2010–09

This nep-net issue is ©2010 by Yi-Nung Yang. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.