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on Network Economics |
| By: | Lapo Filistrucchi (CentER, TILEC, Tilburg University and Department of Economics, University of Florence); Tobias J. Klein (CentER, TILEC, Tilburg University) |
| Abstract: | We model a two-sided market with heterogeneous customers and two heterogeneous network effects. In our model, customers on each market side care differently about both the number and the type of customers on the other side. Examples of two-sided markets are online platforms or daily newspapers. In the latter case, for instance, readership demand depends on the amount and the type of advertisements. Also, advertising demand depends on the number of readers and the distribution of readers across demographic groups. There are feedback loops because advertising demand depends on the numbers of readers, which again depends on the amount of advertising, and so on. Due to the difficulty in dealing with such feedback loops when publishers set prices on both sides of the market, most of the literature has avoided models with Bertrand competition on both sides or has resorted to simplifying assumptions such as linear demands or the presence of only one network effect. We address this issue by first presenting intuitive sufficient conditions for demand on each side to be unique given prices on both sides. We then derive sufficient conditions for the existence and uniqueness of an equilibrium in prices. For merger analysis, or any other policy simulation in the context of competition policy, it is important that equilibria exist and are unique. Otherwise, one cannot predict prices or welfare effects after a merger or a policy change. The conditions are related to the own- and cross-price effects, as well as the strength of the own and cross network effects. We show that most functional forms used in empirical work, such as logit type demand functions, tend to satisfy these conditions for realistic values of the respective parameters. Finally, using data on the Dutch daily newspaper industry, we estimate a flexible model of demand which satisfies the above conditions and evaluate the effects of a hypothetical merger and study the effects of a shrinking market for offline newspapers. |
| Keywords: | two-sided markets, indirect network effects, merger simulation, equilibrium, competition policy, newspapers |
| JEL: | L13 L40 L82 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1320&r=net |
| By: | Sagit Bar-Gill (Tel Aviv University) |
| Abstract: | Online platforms, such as Google, Facebook, or Amazon, are constantly expanding their activities, while increasing the overlap in their service offering. In this paper, we study the scope and overlap of online platforms' activities, when they are endogenously determined. We model an expansion game between two online platforms offering two different services to users for free, while selling user clicks to advertisers. At the outset, each platform offers one service, and users may subscribe to one platform or both (multihoming). In the second stage, each platform decides whether to expand by adding the service already offered by its rival. Platforms' expansion decisions affect users' mobility, and thus the partition of users in the market, which, in turn, affects platform prices and profits. We analyze the equilibrium of the expansion game, demonstrating that, in equilibrium, platforms may decide not to expand, even though expansion is costless. Such strategic "no expansion" decisions are due to quantity and price effects of changes in user mobility, brought on by expansion. Both symmetric expansion and symmetric no-expansion equilibria may arise, as well as asymmetric expansion equilibria, even for initially symmetric platforms. |
| Keywords: | Two-sided markets, Platforms, Entry, Online advertising |
| JEL: | L11 L13 L14 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1312&r=net |
| By: | Charles Angelucci (Harvard University); Julia Cage (Harvard University); Romain de Nijs (Paris School of Economics) |
| Abstract: | We investigate theoretically and empirically the determinants of second-degree price discrimination in two-sided markets. We build a model in which a newspaper must attract both readers and advertisers. Readers are uncertain as to their future benefit from reading, and heterogeneous in their taste for reading. Advertisers are heterogeneous in their outside option, taste for subscribers, and taste for occasional buyers. To estimate empirically the effect of the advertisers' side of the industry on price discrimination on the readers' side, we use a "quasi-natural experiment". We exploit the introduction of advertisement on French Television in 1968, which we treat as a negative shock on advertisement revenues of daily national newspapers (treated group), but not on daily local newspapers (control group). We build a new dataset on French local newspapers between 1960 and 1974 and perform a Differences-in-Differences analysis. We find robust evidence of increased price discrimination as a result of a drop in advertisement revenues. |
| Keywords: | Newspaper Industry, Second-Degree Price Discrimination, Two-Sided Markets |
| JEL: | L11 M13 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1313&r=net |
| By: | Christoffer Kok; Mattia Montagna |
| Abstract: | In this paper, we develop an agent-based multi-layered interbank network model based on a sample of large EU banks. The model allows for taking a more holistic approach to interbank contagion than is standard in the literature. A key finding of the paper is that there are non-negligible non-linearities in the propagation of shocks to individual banks when taking into account that banks are related to each other in various market segments. In a nutshell, the contagion effects when considering the shock propagation simultaneously across multiple layers of interbank networks can be substantially larger than the sum of the contagion-induced losses when considering the network layers individually. In addition, a bank “systemic importance” measure based on the multi-layered network model is developed and is shown to outperform standard network centrality indicators |
| Keywords: | Financial Contagion, interbank market, Network theory |
| JEL: | C45 C63 D85 G21 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1873&r=net |
| By: | Hanna Halaburda (Bank of Canada); Bruno Jullien (Toulouse School of Economics); Yaron Yehezkel (Tel Aviv University) |
| Abstract: | This paper considers a dynamic platform competition in a market with network externalities. We ask two research questions. The first one asks how the beliefs advantage carries over in time, and whether a low-quality platform can maintain its focal position along time. We show that for very high and very low discount factors it is possible for the low-quality platform to maintain its focal position indefinitely. But for the intermediate discount factor the higher quality platform wins and keeps the market. The second question asks what drives changes in the market leadership along time (observed in many markets, like smartphones and video-game consoles), and how such changes can be supported as a dynamic equilibrium outcome. We offer two explanations. The first explanation relies on intrinsic equilibrium uncertainty. The second explanation relies on the adoption of technology. One could expect such change in the market leader to be a sign of intense competition between platforms. However, we find that changes in leadership indicate softer price competition. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1310&r=net |
| By: | James Bland (Department of Economics, Purdue University); Nikos Nikiforakis (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | When agents face coordination problems their choices often impose externalities on third parties. We investigate whether such externalities can affect equilibrium selection in a series of one-shot coordination games varying the size and the sign of the externality. We fi?nd that third-party externalities have a limited effect on decisions. A large majority of participants in the experiment are willing to take an action that increases their income slightly, even if doing so causes substantial inequalities and reductions in overall efficiency. Individuals revealed to be other-regarding in a non-strategic allocation task often behave as-if sel?fish when trying to coordinate. |
| Keywords: | social preferences, efficiency, externalities, tacit coordination, equilibrium selection, efficiency. |
| JEL: | D63 D01 D62 C90 D03 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2013_19&r=net |
| By: | Lukasz Grzybowski (Telecom ParisTech, Department of Economics and Social Sciences, 46 rue Barrault, 75013 Paris, France); Frank Verboven (University of Leuven and CEPR (London), Naamsestraat 69, 3000 Leuven, Belgium) |
| Abstract: | We use rich survey data on 133,825 households from 27 EU countries during 2005-2011 to analyze substitution between fixed-line and mobile telecommunications services. We estimate a discrete choice model where households may choose between having mobile or fixed-line voice access only, or using both technologies at the same time. We obtain the following main findings. First, fixed-line and mobile connections are on average perceived as substitutes. But there is substantial heterogeneity across households and EU regions, with stronger substitution in Central and Eastern European countries. Second, there is strong complementarity between fixed-line and mobile connections that are offered by the fixed-line incumbent operator. This gives the incumbent a possibility to leverage its position in the fixed-line market into the mobile market. Third, fixed broadband technologies such as DSL and cable generate strong complementarities between fixed and mobile access, while mobile broadband strengthens substitution (at a smaller scale). The emergence of fixed broadband has thus been an important additional source through which incumbents leverage their strong position in the fixed-line network. |
| Keywords: | fixed-to-mobile substitution; incumbency advantage; broadband access |
| JEL: | L13 L43 L96 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1309&r=net |
| By: | Volodymyr Bilotkach (Newcastle University, Department of Economics); Nicholas G. Rupp (East Carolina University, Department of Economics); Vivek Pai (University of California, Irvine, and KBB Department of Economics) |
| Abstract: | We approach the issue of the value of a platform to a seller in a two-sided market where both buyers and sellers multi-home. A seller that loses access to a major buyer platform can potentially incur substantial financial losses. We exploit a recent conflict between American Airlines and two leading online travel agencies (Expedia and Orbitz), which dropped American Airlines fare quotes during the first quarter of 2011. We present a simple model of airline ticket distribution. This model provides a framework to analyze the events that happened in the American Airlines – online travel agency conflict. We analyze price data for the first quarter of 2010 and 2011, employing a simple difference-in-differences identification strategy to evaluate changes in American Airlines’ fares. After controlling for across-market heterogeneity, carrier-specific time-invariant effects, and time-specific carrier-invariant effects, American Airlines’ fares during the conflict were 2.7-4.2 percent lower than similar fares charged by American’s main competitors (United, Continental, Delta, and US Airways). The fare effect is most pronounced in the sub-sample of one-stop itineraries, where competition is stronger, and customers are more likely to have to rely on travel agents – rather than carriers’ own web-sites – for flight bookings. In sum, our findings indicate that access to major buyer platforms is considerably valuable to a seller. We estimate that during the first quarter of 2011 the loss of access to the Expedia/Orbitz platforms resulted in over $50 million reduction in revenue for American Airlines. |
| Keywords: | two-sided markets, value of platforms, online travel agents Length: 31 pages |
| JEL: | D4 L4 L93 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1308&r=net |
| By: | Jason Chan (New York University, Stern School of Business, IOMS Department); Anindya Ghose (New York University, Stern School of Business, IOMS Department); Robert Seamans (New York University, Stern School of Business, Management Department) |
| Abstract: | The Internet has had profound effects on society, both positive and negative. In this paper we examine the effect of the Internet on a negative spillover: hate crime. In order to better understand the link, we study the extent to which broadband availability affects racial hatecrimes in the US from 1999 – 2008. To address measurement error, we instrument for broadband availability using slope of terrain. We find strong evidence that broadband availability increases racial hate crimes. The results are stronger in areas with greater racial segregation and with more online searches for racist words, suggesting that the direct effect of the Internet on hate crime is primarily due to a heightening of pre-existing propensities to engage in hate activity. We find no evidence that the Internet has affected crime reporting. The results are robust to alternative specifications and falsification tests. These results shed light on one of the many offline spillovers from increased online access, and suggest that governmental and private regulation of online content may help reduce hate crime. |
| Keywords: | Internet, broadband, online-offline interaction, hate crime, race |
| JEL: | C26 J15 K49 O33 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1302&r=net |
| By: | Felipe Balmaceda (Facultad de Economía y Empresa, Universidad Diego Portales); Juan Escobar (Departamento de Ingenieria Industrial, Universidad de Chile) |
| Abstract: | This paper investigates the social structures that maximize trust and cooperation when agreements are implicitly enforced. We study a repeated trust game in which the social network determines the information transmission technology. We show that cohesive communities, modeled as social networks of complete components, emerge as the optimal community design. Cohesive communities generate some degree of common knowledge of transpired play that allows players to coordinate their punishments and, as a result, yield relatively high equilibrium payos. Our results provide an economic rationale for the commonly argued optimality of cohesive social networks. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ptl:wpaper:40&r=net |
| By: | Vincent BOUCHER; Ismael MOURIFIÉ |
| Abstract: | We explore the asymptotic properties of pairwise stables networks (Jackson and Wolinsky, 1996). Specifically, we want to recover a set of parameters from the individuals' utility functions using the observation of a single pairwise stable network. We develop Pseudo Maximum Likelihood estimator and show that it is consistent and asymptotically normally distributed under a very weak version of homophily. The approach is compelling as it provides explicit, easy-to-check conditions on the admissible set of preferences. Moreover, the method is easily implementable using pre-programmed estimators available in most statistical packages. We provide an application of our method using the Add Health database. |
| Keywords: | social network, pairwise stability, spatial econometrics |
| JEL: | C13 D85 |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-499&r=net |
| By: | Zsolt Katona (Haas School of Business, UC Berkeley) |
| Abstract: | This paper studies the competition between firms for influencers in a network. Firms spend effort to convince influencers to recommend their products. The analysis identifies the offensive and defensive roles of spending on influencers. The value of an influencer only depends on the in-degree distribution of the influence network. Influencers who exclusively cover a high number of consumers are more valuable to firms than those who mostly cover consumers also covered by other influencers. Firm profits are highest when there are many consumers with a very low or with very high in-degree. Consumers with an intermediate level of in-degree contribute negatively to profits and high in-degree consumers increase profits when market competition is not intense. Prices are generally lower when consumers are covered by many influencers, however, firms are not always worse off with lower prices. The nature of consumer response to recommendations makes an important difference. When first impressions dominate, firm profits for dense networks are higher, but when recommendations have a cumulative influence profits are reduced as the network becomes dense. |
| Keywords: | Social Networks, Influencers, Competition |
| JEL: | M31 C72 D44 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1306&r=net |
| By: | Junjie Zhou (School of International Business Administration, Shanghai University of Finance and Economics); Ying-Ju Chen (University of California at Berkeley); |
| Abstract: | As a common practice, various firms initially make information and access to their products/services scarce within a social network; identifying influential players that facilitate information dissemination emerges as a pivotal step for their success. In this paper, we tackle this problem using a stylized model that features payoff externalities and local network effects, and the network designer is allowed to release information to only a subset of players (leaders); these targeted players make their contributions first and the rest followers move subsequently after observing the leaders' decisions. In the presence of incomplete information, the signaling incentive drives the optimal selection of leaders and can lead to a first-order materialistic effect on the equilibrium outcomes. We propose a novel index for the key leader selection (i.e., a single player to provide information to) that can be substantially different from the key player index in \ \cite{ballester2006s} and the key leader index with complete information proposed in \cite{zhou13benefit}. We also show that in undirected graphs, the optimal leader group identified in \cite{zhou13benefit} is exactly the optimal follower group when signaling is present. The pecking order in complete graphs suggests that the leader should be selected by the ascending order of intrinsic valuations. We also examine the out-tree hierarchical structure that describes a typical economic organization. The key leader turns out to be the one that stays in the middle, and it is not necessarily exactly the central player in the network. |
| Keywords: | social network, signaling, information management, targeted advertising, game theory |
| JEL: | D21 D29 D82 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1304&r=net |