nep-net New Economics Papers
on Network Economics
Issue of 2011‒12‒13
seventeen papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Experimentation in Two-Sided Markets By Peitz, Martin; Rady, Sven; Trepper, Piers
  2. The monopoly benchmark on two-sided markets By Mueller, Christopher; Boehme, Enrico
  3. Improving Investment Coordination in Electricity Networks Through Smart Contracts By Christine Brandstätt; Gert Brunekreeft; Nele Friedrichsen
  4. The Dynamics of Continuous Cultural Traits in Social Networks By Berno Buechel; Tim Hellmann; Michael M. Pichler
  5. A layered and nuanced assessment of network neutrality rationales By Frieden, Rob
  6. Internet access and investment incentives for broadband service providers By Baranes, Edmond; Poudou, Jean-Christophe
  7. Critical market shares for investors and access seekers and competitive models in fibre networks By Jay, Stephan; Neumann, Karl-Heinz; Plückebaum, Thomas
  8. Procompetitive infrastructure sector regulation and diffusion of innovation: The case of broadband networks By Gruber, Harald; Koutroumpis, Pantelis
  9. Analysis of business opportunities of secondary use of spectrum: The case of TV white space for mobile broadband access By Markendahl, Jan; Mäkitalo, Östen
  10. Agame-theoretical approach to network capacity planning under competition By Waldman, Helio; Bortoletto, Rodrigo C.; Pavani, Gustavo S.
  11. Network neutrality: Hong Kong's perspectives By Au, Man Ho
  12. Informal social networks, organised crime and local labour market By Antonella Mennella
  13. The effect of the interbank network structure on contagion and common shocks By Georg, Co-Pierre
  14. Learning a bayesian network from ordinal data By Flaminia Musella
  15. School ties: An analysis of homophily in an adolescent friendship network By Simon Burgess; Eleanor Sanderson; Marcela Umana-Aponte
  16. Avoiding evolutionary inefficiencies in innovation networks By Pyka, Andreas
  17. Looking for grass-root sources of systemic risk: the case of "cheques-as-collateral" network By Michalis Vafopoulos

  1. By: Peitz, Martin; Rady, Sven; Trepper, Piers
    Abstract: We study optimal experimentation by a monopolistic platform in a two-sided market framework. The platform provider faces uncertainty about the strength of the externality each side is exerting on the other. It maximizes the expected present value of its profit stream in a continuous-time infinite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two externalities are of approximately equal strength. If the externality that one side exerts is sufficiently weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prices when the platform provider chooses quantities. While the optimal policy does not admit closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.
    Keywords: Bayesian Learning; Monopoly Experimentation; Network Effects; Optimal Control; Two-Sided Market
    JEL: D42 D83 L12
    Date: 2011–11
  2. By: Mueller, Christopher; Boehme, Enrico
    Abstract: The literature on the effects of market concentration in platform industries or two-sided markets often compares the competitive outcome against a benchmark. This benchmark is either the “joint management” solution in which one decision maker runs all platforms or a “pure” monopoly with just one platform. Literature has not generally discussed, which benchmark is the appropriate one. We show that the appropriate benchmark, i.e. how many platforms the monopolist will operate, depends on whether agents multi- or singlehome, whether the externalities are positive or negative, and in some cases on the properties of the demand functions. Different situations require different benchmarks. Our results also help to anticipate the effects of proposed platform mergers, where the assessment might crucially depend on the number of platforms after a merger.
    Keywords: two-sided markets; market concentration; monopoly
    JEL: K20 L51 L13 D42 D43 L12
    Date: 2011–11–01
  3. By: Christine Brandstätt; Gert Brunekreeft; Nele Friedrichsen
    Abstract: Smart contracts based on voluntary participation and optionality can be a low transaction cost solution to implement locational signals in distribution networks and thereby avoid network investment. This paper examines the efficiency properties of smart contracts. Based on a three-node example network we show that cases exist in which smart contracts can achieve a pareto-improvement compared to the status-quo even with voluntary participation. With the pareto improvement at least one party is better of under a smart contract without worsening the situation for anyone else. We note that this requirement is very restrictive and leaves significant potential for efficiency improvements by smart contracts untapped. We then discuss the implementation of smart contracts with incentive regulation. There are two main tasks for the regulator: allowing network operators flexibility to offer such contracts and incentivizing network operators to do so.
    Keywords: network investment, distribution networks, locational pricing, smart contracts
    JEL: D23 D43 L14 L22
    Date: 2011–09
  4. By: Berno Buechel (University of Hamburg); Tim Hellmann (Institute of Mathematical Economics, Bielefeld University); Michael M. Pichler (Institute of Mathematical Economics, Bielefeld University)
    Abstract: We consider an OLG model (of a socialization process) where continuous traits are transmitted from an adult generation to the children. A weighted social network describes how children are influenced not only by their parents but also by other role models within the society. Parents can invest into the purposeful socialization of their children by strategically displaying a cultural trait (which need not coincide with their true trait). Based on Nash equilibrium behavior, we study the dynamics of cultural traits throughout generations. We provide conditions on the network structure that are sufficient for long-run convergence to a society with homogeneous subgroups. In the special case of quadratic utility, the condition is that each child is more intensely shaped by its parents than by the social environment. The model is akin to the classical DeGroot model of opinion formation which we generalize by allowing for strategic interaction.
    Keywords: cultural transmission, social networks, preference formation, cultural persistence, opinion dynamics
    Date: 2011–12
  5. By: Frieden, Rob
    Abstract: --
    Date: 2011
  6. By: Baranes, Edmond; Poudou, Jean-Christophe
    Abstract: This paper studies a model of the Internet broadband market as a platform in order to show how different pricing schemes from the so-called net neutrality may increased economic efficiency by allowing more investment of access providers and enhancing consumers surplus and social welfare. --
    Keywords: Network neutrality,Flat rates,Termination fees
    JEL: L51 L86 L96
    Date: 2011
  7. By: Jay, Stephan; Neumann, Karl-Heinz; Plückebaum, Thomas
    Abstract: In this paper we consider and evaluate NGA architectures which meet the foreseeable future bandwidth demand and allow for highest bandwidth and quality for end-users and which no longer rely on copper cable elements. These are FTTH architectures only. From all available FTTH architectures we concentrate on the two most relevant architectures in Europe, Ethernet Point-to-Point and GPON. We assume the incumbent to be the investor in the NGA network infrastructure. If the NGA architecture is based on a Point-to-Point fibre plant we have modelled the competitors as using unbundled fibre loops as the wholesale access service. If the architecture is based on a Point-to-Multipoint fibre plant, we consider an active wholesale access (bitstream access) at the MPoP or at the core network node locations. Our basic modelling relies upon an engineering bottom-up cost modelling approach. We model the total cost of the services considered under efficient conditions, taking into account the cost of all network elements needed to produce these services in the specific architecture deployed. This approach is coherent with a Long Run Incremental Cost approach as applied in regulatory economics. Our modelling approach generates a broad set of results including the relative performance of the various network architectures, investment requirements and the degree of profitable coverage. In this paper, however, we focus on the results on the potential for competition and potential market structures in an NGA environment. --
    Keywords: NGA architecture,cost modelling,FTTH,coverage,access models,unbundling
    JEL: L10 L13 L14
    Date: 2011
  8. By: Gruber, Harald; Koutroumpis, Pantelis
    Abstract: The paper assesses the scope for competition inducing infrastructure regulation in furthering the diffusion of innovation. The paper uses data on the adoption of broadband services comprising a global panel of 167 countries. The effects of different regulatory provisions are assessed. The result of this paper allows qualifying different elements of the regulatory debate on the consequences of access requirements, including mandatory unbundling. First, it suggests that interplatform competition is generally not leading to acceleration in broadband diffusion. Second, with respect to intra-platform competition, this has been analyzed at two different levels: full unbundling and retail competition. In the first case the competitor is investing in network infrastructure to be able to induce some degree of service differentiation. With retail competition the scope for service differentiation is much more limited and hence competition is most likely centered on price. While both lead to faster diffusion, the results consistently show that the effect from retail competition is proportionally about twice as strong compared to unbundling. Moreover, the analysis of the time profile of the effects show that this impact on diffusion first increases until the third or fourth year after introduction, but then dissipates away. Also here one can argue that retail differentiation leads to more intense price competition and therefore faster diffusion. Different robustness checks for the results are provided. --
    Keywords: Broadband,regulation,innovation,service competition,platform competition,local loop unbundling
    JEL: L96 L51 O33
    Date: 2011
  9. By: Markendahl, Jan; Mäkitalo, Östen
    Abstract: The introduction of mobile broadband technology, smartphones and dongles has resulted in a tremendous increase of mobile data traffic. Future demand for more capacity can be met by allocation of more bandwidth and new spectrum bands to mobile communication. But spectrum is a scarce resource and allocation of new licensed bands will only partly satisfy the growing demand. Another possibility is secondary use of spectrum bands which primarily have been allocated for other services, e.g. TV or weather and traffic control radars. The secondary use exploits un-used spectrum in frequency, time or physical location. Such un-used spectrum in the TV bands is called TV white space (TV WS). In this paper we will focus on the business analysis of cellular use of TV white spaces where the service is mobile broadband access. A number of business cases are analyzed where we look into mobile broadband services in rural and urban areas and for indoor use. The service can be provided by a mobile network operator with licensed spectrum or by an operator using TV white spaces only. The analysis indicates that market entrants will be in a more difficult position than the established actors. New operators need to invest in networks, platforms, marketing and customers. Promising business cases are presented for existing mobile operators that use TV WS as complement for capacity expansion in urban areas and for local operators (e.g. facility owners) that will use TV WS and own indoor infrastructure in order to offer indoor capacity to mobile operators. --
    Keywords: Mobile broadband networks,spectrum allocation,cost structure analysis,spectrum,business case network deployment strategies,telecommunications,economic development of natural resources,regulation and industrial policy
    JEL: L96 L50 O13
    Date: 2011
  10. By: Waldman, Helio; Bortoletto, Rodrigo C.; Pavani, Gustavo S.
    Abstract: The paper discusses the dimensioning strategies of two network providers (operators) that supply channels to the same population of users in a competitive environment. Usersare assumed to compete for best service (lowest blocking probability of new request), while operators wishto maximize their profits. This setting gives rise to two interconnected, noncooperative games: a) a users game, in which the partition of primary traffic between operators is determined by the operators' channel capacities and by the users' blocking-avoidance strategy; and b) a network dimensioning game between operators in which the players alternate dimensioning decisions thatmaximize their profit rate under the current channel capacity of his/her opponent. At least for two plausible users' blocking avoidance strategies discussed in the paper, the users game will always reach some algorithmic equilibrium. In the operators' game, the player strategies are given by their numbers of deployed chanels, limited by their available infrastructure resources. If the infrastrucutre is under-dimensioned with respect to the traffic rate, the operators game willreach a Nash equilibrium when both players reach full use of their available infrastructures. Otherweise, a Nash equilibrium may also arise if both operators incur the same deployment costs. If costs are asymmetric, though, the alternating game may enter a loop. If the asymmetry is modest, both players may then try to achieve a competitive monopoly in which the opponent is forced to leave the game or operate with a loss (negative profit). However, if the asymmetry is high enough, only the player with the lower costs can force his opponent to leave the game while still holding a profitable operation. --
    Keywords: network dimensioning,game theory,duopoly,Nash equilibrium,circuit switching,blocking probability
    JEL: C72
    Date: 2011
  11. By: Au, Man Ho
    Abstract: --
    Date: 2011
  12. By: Antonella Mennella
    Abstract: This paper’s purpose is to show a new informal social networks interpretation, according to which social networks change their nature if they are located in social contexts where organised crime is relevant. Here the perusal of a social network is just a necessary condition to enter the labour market rather than a deliberate choice. Moreover this labour market is the ground where favouritisms and social and electoral consensus policies take place
    Keywords: social networks, organised crime, labour market
    JEL: D85 J64 K00
    Date: 2011–03
  13. By: Georg, Co-Pierre
    Abstract: This paper proposes a dynamic multi-agent model of a banking system with central bank. Banks optimize a portfolio of risky investments and riskless excess reserves according to their risk, return, and liquidity preferences. They are linked via interbank loans and face stochastic deposit supply. Evidence is provided that the central bank stabilizes interbank markets in the short-run only. Comparing different interbank network structures, it is shown that money-center networks are more stable than random networks. Systemic risk via contagion is compared to common shocks and it is shown that both forms of systemic risk require different optimal policy responses. --
    Keywords: systemic risk,contagion,common shocks,multi-agent simulations
    JEL: C63 E52 G01 G21
    Date: 2011
  14. By: Flaminia Musella
    Abstract: Bayesian networks are graphical models that represent the joint distributionof a set of variables using directed acyclic graphs. When the dependence structure is unknown (or partially known) the network can be learnt from data. In this paper, we propose a constraint-based method to perform Bayesian networks structural learning in presence of ordinal variables. The new procedure, called OPC, represents a variation of the PC algorithm. A nonparametric test, appropriate for ordinal variables, has been used. It will be shown that, in some situation, the OPC algorithm is a solution more efficient than the PC algorithm.
    Keywords: Structural Learning, Monotone Association, Nonparametric Methods
    JEL: C14 C51
    Date: 2011–10
  15. By: Simon Burgess; Eleanor Sanderson; Marcela Umana-Aponte
    Abstract: Homophily is the tendency to establish relationships among people who share similar characteristics or attributes. This study presents evidence of homophilic behaviour for an adolescent friendship network of 6,961 links in the West of England. We control for unobserved characteristics by estimating school and individual fixed effects and present evidence on the role of length and closeness of friendships on the degree of homophily. We also exploit the dynamics of the friendship by comparing similarities among existing and future friends. Results indicate that academic achievement, personality, educational aspirations, bad behaviour and mother’s education are essential in the friendship formation process. However, income and parents’ occupational class proved to be insignificant. We also show that the degree of homophily among friends selected from a random process is much lower than that of the observed friendships.
    Keywords: Networks, Homophily, Segregation, Friendships, Adolescents
    JEL: L14 C33 D83 Z13
    Date: 2011–08
  16. By: Pyka, Andreas
    Abstract: Innovation policy is in need for a rational which allows the design and evaluation of policy instruments. In economic policy traditionally the focus is on market failures and efficiency measures are used to decide whether policy should intervene and which instrument should be applied. In innovation policy this rational cannot meaningfully be applied because of the uncertain and open character of innovation processes. Uncertainty is not a market failure and cannot be repaired. Inevitably policy makers are subject to failure and their goals are to be considered as much more modest compared to the achievement of a social optimum. Instead of optimal innovation, the avoidance of evolutionary inefficiencies becomes the centrepiece of innovation policy making. Superimposed to the several sources of evolutionary inefficiencies are socalled network inefficiencies. Because of the widespread organisation of innovation in innovation networks, the network structures and dynamics give useful hints for innovation policy, where and when to intervene. --
    Keywords: innovation policy,innovation networks,uncertainty,exploration and exploitation,evolutionary inefficiencies,policy rational
    Date: 2011
  17. By: Michalis Vafopoulos
    Abstract: The global financial system has become highly connected and complex. Has been proven in practice that existing models, measures and reports of financial risk fail to capture some important systemic dimensions. Only lately, advisory boards have been established in high level and regulations are directly targeted to systemic risk. In the same direction, a growing number of researchers employ network analysis to model systemic risk in financial networks. Current approaches are concentrated on interbank payment network flows in national and international level. This work builds on existing approaches to account for systemic risk assessment in micro level. Particularly, we introduce the analysis of intra-bank financial risk interconnections, by examining the real case of "cheques-as-collateral" network for a major Greek bank. Our model offers useful information about the negative spillovers of disruption to a financial entity in a bank's lending network and could complement existing credit scoring models that account only for idiosyncratic customer's financial profile. Most importantly, the proposed methodology can be employed in many segments of the entire financial system, providing a useful tool in the hands of regulatory authorities in assessing more accurate estimates of systemic risk.
    Date: 2011–12

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