nep-net New Economics Papers
on Network Economics
Issue of 2013‒07‒05
four papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Efficient Upgrading in Network Goods : Is Commitment Always Good? By Athanasopoulos, Thanos
  2. Volume of Trade and Dynamic Network Formation in Two-Sided Economies By Roland Pongou; Roberto Serrano
  3. Free Trade Agreements as dynamic farsighted networks By James Lake
  4. Network Security and Contagion By Daron Acemoglu; Azarakhsh Malekian; Asuman Ozdaglar

  1. By: Athanasopoulos, Thanos (Department of Economics, University of Warwick,)
    Abstract: The frequency of upgrades in technology markets is not socially optimal when the quality improvement is negligible and smaller than the adoption cost of the new product. In monopolies, the literature has identified a sufficient factor for efficient upgrading: the firm’s power to commit to whether it will upgrade or not in the future. This is not true when an entry threat applies. In fact, it could even be that commitment is a factor of inefficiency when the market is open to competition. As shown in this paper, the incumbent’s commitment adds an additional source of inefficiency while an entry threat could dissolve social optimality.
  2. By: Roland Pongou; Roberto Serrano
    Abstract: We study the long-run stability of trade networks in a two-sided economy of agents labelled men and women. Each agent desires relationships with the other type, but having multiple partners is costly. This cost-bene?t trade-o¤ results in each agent having a single-peaked utility over the number of partners?the volume of trade?, the peak being greater for men than for women. We propose a stochastic matching process in which self-interested agents form and sever links over time. Links can be added or deleted, sometimes simultaneously by a single agent. While the unperturbed process yields each pairwise stable network as an absorbing state, stochastic stability in two perturbed processes provides a signi?cant re?nement, leading respectively to egalitarian and anti-egalitarian pairwise stable networks. This has implications for the concentration on each side of the market of a random information shock. The analysis captures stylized facts, related to market fragmentation, concentration and contagion asymmetry, in several two-sided economies.
    Keywords: Two-sided networks, pairwise stability, stochastic stability, herd externality, informational cascade, fragmentation, concentration, economy thinness, contagion asymmetry.
    Date: 2013
  3. By: James Lake (Southern Methodist University)
    Abstract: In the presence of multilateral negotiations, are Free Trade Agreements (FTAs) necessary for, or will they prevent, free trade? This question is explored using a novel dynamic network theoretic model where countries are farsighted and asymmetric in terms of market size. I develop a new equilibrium concept that endogenizes the order of negotiations. FTAs are necessary for free trade when there are two small countries and one large country but FTAs prevent free trade when there are two large countries and one small country. The model provides insights into the dynamics of recent trade negotiations involving the US.
    Keywords: Free Trade Agreements, preference erosion, multilateralism, free trade, networks, farsighted
    JEL: C71 F12 F13
    Date: 2013–06
  4. By: Daron Acemoglu; Azarakhsh Malekian; Asuman Ozdaglar
    Abstract: We develop a theoretical model of security investments in a network of interconnected agents. Network connections introduce the possibility of cascading failures due to an exogenous or endogenous attack depending on the profile of security investments by the agents. The general presumption in the literature, based on intuitive arguments or analysis of symmetric networks, is that because security investments create positive externalities on other agents, there will be underinvestment in security. We show that this reasoning is incomplete because of a first-order economic force: security investments are also strategic substitutes. In a general (non-symmetric) network, this implies that underinvestment by some agents will encourage overinvestment by others. We demonstrate by means of examples that there can be overinvestment by some agents and also that aggregate probabilities of infection can be lower in equilibrium compared to the social optimum. We then provide sufficient conditions for underinvestment. This requires both sufficiently convex cost functions (convexity alone is not enough) and networks that are either symmetric or locally tree-like. We also characterize the impact of network structure on equilibrium and optimal investments. Finally, we show that when the attack location is endogenized (by assuming that the attacker chooses a probability distribution over the location of the attack in order to maximize damage), there is an additional incentive for overinvestment: greater investment by an agent shifts the attack to other parts of the network.
    JEL: D6 D62
    Date: 2013–06

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