nep-net New Economics Papers
on Network Economics
Issue of 2013‒11‒02
ten papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Platform Competition as Network Contestability By Robert P. Gilles; Dimitrios Diamantaras
  2. Bidding for Network Size: Platform Competition when Quality and Network Size are Complements By Renaud Foucart; Jana Friedrichsen
  3. Trade Integration, Market Size and Industrialization: Evidence from China's National Trunk Highway System By Benjamin Faber
  4. For-Profit Search Platforms By Niedermayer, Andras; Shneyerov, Artyom
  5. “Mobility, networks and innovation: The role of regions’ absorptive capacity” By Ernest Miguélez; Rosina Moreno
  6. Trust and manipulation in social networks By FORSTER, Manuel; MAULEON, Ana; VANNETELBOSCH, Vincent
  7. Illiquidity and Insolvency: a Double Cascade Model of Financial Crises By Thomas R. Hurd; Davide Cellai; Huibin Cheng; Sergey Melnik; Quentin Shao
  8. You Are Who Your Friends Are: An Experiment on Trust and Homophily in Friendship Networks By Fabian Winter; Mitesh Kataria
  9. Do Incentive Systems Spur Work Motivation of Inventors in High Tech Firms ? A Group-Based Perspective By Nathalie Lazaric; Alain Raybaut
  10. Kantian Optimization: An Approach to Cooperative Behavior By John E. Roemer

  1. By: Robert P. Gilles (Queen's University Management School, Belfast, UK); Dimitrios Diamantaras (Department of Economics, Temple University)
    Abstract: Recent research in industrial organisation has investigated the essential place that middlemen have in the networks that make up our global economy. In this paper we attempt to understand how such middlemen compete with each other through a game theoretic analysis using novel techniques from decision-making under ambiguity. We model a purposely abstract and reduced model of one middleman who provides a two-sided platform, mediating surplus-creating interactions between two users. The middleman evaluates uncertain outcomes under positional ambiguity, taking into account the possibility of the emergence of an alternative middleman offering intermediary services to the two users. Surprisingly, we find many situations in which the middleman will purposely extract maximal gains from her position. Only if there is relatively low probability of devastating loss of business under competition, the middleman will adopt a more competitive attitude and extract less from her position.
    Keywords: competition, middlemen, ambiguity, platform, two-sided market, market intermediation
    JEL: C72 D81 D85
    Date: 2013–10
  2. By: Renaud Foucart; Jana Friedrichsen
    Abstract: We study two platforms competing for members by investing in network quality.� Quality is complementary to the network size: the marginal utility generated by an additional member increases with the network's quality.� Platforms are imperfect substitutes: a share of the potential members are biased toward each of the platforms and some are indifferent ex ante.� We assume that, in case of multiple equilibria, consumers use the investment in quality as a coordination device.� We find that, in equilibrium, platforms randomize over two disconnected intervals of investment levels, corresponding to competing for either the entire population or the mass of ex-ante different members.� While the "prize" of winning the competition for members is identical for both platforms, the value of the outside option "not investing" depends on a platform's share of ex-ante biased members.� The platform with the smallest share of ex-ante biased members bids more aggressively to compensate for its lower outside option and achieves a monopoly network with higher probability than its competitor.
    Keywords: Internet, Platforms, Investment, Network Effects
    JEL: D43 D44 M13
    Date: 2013–10–07
  3. By: Benjamin Faber
    Abstract: Large scale transport infrastructure investments connect both large metropolitan centers of production as well as small peripheral regions. Are the resulting trade cost reductions a force for the diffusion of industrial and total economic activity to peripheral regions, or do they reinforce the concentration of production in space? This paper exploits China's National Trunk Highway System as a large scale natural experiment to contribute to our understanding of this question. The network was designed to connect provincial capitals and cities with an urban population above 500,000. As a side effect, a large number of small peripheral counties were connected to large metropolitan city regions. To address non-random route placements on the way between targeted city nodes, I propose an instrumental variable strategy based on the construction of least cost path spanning tree networks. The estimation results suggest that network connections led to a reduction in GDP growth among no n-targeted peripheral counties due to reduced industrial output growth. Additional estimation results present evidence that appears consistent with the existence of core-periphery effects of trade integration as found in increasing returns trade theory and economic geography
    Keywords: Trade integration, industrialization, road infrastructure
    JEL: F12 F15 O18 R12
    Date: 2013–10
  4. By: Niedermayer, Andras; Shneyerov, Artyom
    Abstract: We consider optimal pricing by a profit-maximizing platform running a dynamic search and matching market. Buyers and sellers enter in cohorts over time, meet and bargain under private information. The optimal centralized mechanism, which involves posting a bid-ask spread, can be decentralized through participation fees charged by the intermediary to both sides. The sum of buyers’ and sellers’ fees equals the sum of inverse hazard rates of the marginal types and their ratio equals the ratio of buyers’ and sellers’ bargaining weights. We also show that a monopolistic intermediary in a search market may be welfare enhancing.
    Keywords: Dynamic random matching; two-sided private information; intermediaries
    JEL: D82 D83
    Date: 2013–07–16
  5. By: Ernest Miguélez (Economics and Statistics Division, World Intellectual Property Organization & AQR-IREA & CReAM); Rosina Moreno (Faculty of Economics, University of Barcelona)
    Abstract: The purpose of this paper is to assess the extent to which regions’ absorptive capacity determines knowledge flows’ impact on regional innovation intensity. In particular, it looks at the role of the cross-regional co-patenting and mobility of inventors in fostering innovation, and how regions with large absorptive capacity make the most of these two phenomena. The paper uses a panel of 274 regions over 8 years to estimate a regional knowledge production function with fixed-effects. Network and mobility variables, and interactions with regions’ absorptive capacity, are included among the r.h.s. variables to test the hypotheses. We find evidence of the role of both mobility and networks. However, inflows of inventors are critical for wealthier regions, while have more nuanced effects for less developed areas. It also shows that regions’ absorptive capacity critically adds an innovation premium to the benefits to tap into external knowledge pools. Indeed, the present study corroborates earlier work on the role of mobility and networks for spatial knowledge diffusion and subsequent innovation. However, it clearly illustrates that a certain level of technological development is critical to take advantage of these phenomena, and therefore “one-size-fits-all” innovation policies need to be reconsidered.
    Keywords: absorptive capacity, inventor mobility, spatial networks, patents, regional innovation. JEL classification:
    Date: 2013–10
  6. By: FORSTER, Manuel (Université catholique de Louvain, CORE, Belgium; CES, Université Paris 1 Panthéon-Sorbonne, France); MAULEON, Ana (Université catholique de Louvain, CORE, Belgium; CEREC, Université Saint-Louis, Bruxelles, Belgium); VANNETELBOSCH, Vincent (Université catholique de Louvain, CORE, Belgium; CEREC, Université Saint-Louis, Bruxelles, Belgium)
    Abstract: We investigate the role of manipulation in a model of opinion formation where agents have opinions about some common question of interest. Agents repeatedly communicate with their neighbors in the social network, can exert some effort to manipulate the trust of others, and update their opinions taking weighted averages of neighbors’ opinions. The incentives to manipulate are given by the agents’ preferences. We show that manipulation can modify the trust structure and lead to a connected society, and thus, make the society reaching a consensus. Manipulation fosters opinion leadership, but the manipulated agent may even gain influence on the long-run opinions. In sufficiently homophilic societies, manipulation accelerates (slows down) convergence if it decreases (increases) homophily. Finally, we investigate the tension between information aggregation and spread of misinformation. We find that if the ability of the manipulating agent is weak and the agents underselling (overselling) their information gain (lose) overall influence, then manipulation reduces misinformation and agents converge jointly to more accurate opinions about some underlying true state.
    Keywords: social networks, trust, manipulation, opinion leadership, consensus, wisdom of crowds
    JEL: D83 D85 Z13
    Date: 2013–09–23
  7. By: Thomas R. Hurd; Davide Cellai; Huibin Cheng; Sergey Melnik; Quentin Shao
    Abstract: In the aftermath of the interbank market collapse of 2007-08, the traditional idea that systemic risk is primarily the risk of cascading bank defaults has evolved into the view that it involves both cascading bank defaults as well as funding liquidity shocks, and that both types of shocks impair the functioning of the remaining undefaulted banks. In current models of systemic risk, these two facets, namely funding illiquidity and insolvency, are treated as two separate phenomena. Our paper introduces a deliberately simplified model which integrates insolvency and illiquidity in financial networks and that can provide answers to the question of how illiquidity or default of one bank can influence the overall level of liquidity stress and default in the network. First, this paper proposes a stylized model of individual bank balance sheets that builds in regulatory constraints. Secondly, three different possible states of a bank, namely the normal state, the stressed state and the insolvent state, are identified with conditions on the bank's balance sheet. Thirdly, the paper models the behavioural response of a bank when it finds itself in the stressed or insolvent states. Importantly, a stressed bank seeks to protect itself from the default of its counterparties, but creates stress in the network by forcing its debtor banks to raise cash. Versions of these proposed models can be solved by large-network asymptotic cascade formulas. Details of numerical experiments are given that verify that these asymptotic formulas yield the expected quantitative agreement with Monte Carlo results for large finite networks. These experiments illustrate clearly our main conclusion that in financial networks, the average default probability is inversely related to strength of banks' stress response and therefore to the overall level of stress in the network.
    Date: 2013–10
  8. By: Fabian Winter (Max-Planck Institute of Economics, Jena); Mitesh Kataria (Max-Planck Institute of Economics, Jena)
    Abstract: We study the existence of homophily (i.e. the tendency for people to make friends with people who are similar to themselves) with respect to trustworthiness. We ask whether two friends show similarly trustworthy behavior towards strangers, and whether this is anticipated by outsiders. We develop a simple model of bayesian learning in trust games and test the derived hypotheses in a controlled laboratory environment. In the experiment, two trustees sequentially play a trust game with the same trustor, where the trustees depending on treatmen are either friends or strangers to each other. We affirm the existence of homophily with re- spect to trustworthiness. Trustors' beliefs about the trustees' trustfulness are not affected by the knowledge about the (non-)existent friendship between the trustees. Behaviorally, however, they indirectly reciprocate the (un-)trustworthy behavior of one trustee towards his/her friends in later interactions.
    Keywords: social networks, homophily, trust, friendship, indirect tit-for-tat
    JEL: C92 D83 J24 J40
    Date: 2013–10–23
  9. By: Nathalie Lazaric (GREDEG CNRS); Alain Raybaut (GREDEG CNRS)
    Abstract: In this paper, we explore with a model the potential tensions between the incentive system of groups of inventors and knowledge diversity in a high tech firm. We show that, when all groups are rewarded and able to interact freely with their peers, extrinsic and intrinsic motives are mutually self-reinforcing, leading to crowding in effects. As a result, the level of created knowledge increases in each group, reinforcing the diversity of the firm’s knowledge base. By contrast, competitive rewards and constrained autonomy are likely to produce motivating effects in a small number of groups, limiting knowledge creation to the firm’s core competencies. In this case, the firm can suffer from crowding out effects by the other groups, leading eventually to the extinction of creation in their fields and reduced diversity in the long run. The results are illustrated with empirical findings from a case study of a French high tech firm.
    Keywords: work motivation, groups of inventors, knowledge creation, knowledge diversity
    JEL: O31 O32 L20 D83 J30
    Date: 2013–10
  10. By: John E. Roemer (Dept. of Political Science, Yale University)
    Abstract: Although evidence accrues in biology, anthropology and experimental economics that homo sapiens is a cooperative species, the reigning assumption in economic theory is that individuals optimize in an autarkic manner (as in Nash and Walrasian equilibrium). I here postulate a cooperative kind of optimizing behavior, called Kantian. It is shown that in simple economic models, when there are negative externalities (such as congestion effects from use of a commonly owned resource) or positive externalities (such as a social ethos reflected in individuals’ preferences), Kantian equilibria dominate Nash-Walras equilibria in terms of efficiency. While economists schooled in Nash equilibrium may view the Kantian behavior as utopian, there is some -- perhaps much -- evidence that it exists. If cultures evolve through group selection, the hypothesis that Kantian behavior is more prevalent than we may think is supported by the efficiency results here demonstrated.
    Keywords: Kantian equilibrium, Social ethos, Implementation
    JEL: D60 D62 D64 C70 H30
    Date: 2012–03

This nep-net issue is ©2013 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.