nep-net New Economics Papers
on Network Economics
Issue of 2014‒08‒09
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Economic replicability tests for next-generation access networks By Marc Lebourges
  2. Opinion Dynamics and Price Formation: a Nonlinear Network Model By Marco D'Errico; Gulnur Muradoglu; Silvana Stefani; Giovanni Zambruno
  3. Who should pay for two-way interconnection? By Sjaak Hurkens; Angel L. López
  4. New Cross-Border Electricity Balancing Arrangements in Europe By Casimir Lorenz; Clemens Gerbaulet
  5. The Word on Banking - Social Ties, Trust, and the Adoption of Financial Products. By Eleonora Patacchini; Edoardo Rainone
  6. Contagious Synchronization and Endogenous Network Formation in Financial Networks By Christoph Aymanns; Co-Pierre Georg

  1. By: Marc Lebourges
    Abstract: This paper discusses the relevant cost standard for the economic replicability test for Next-Generation Access (NGA) networks, described in the Recommendation on Costing and Non-discrimination adopted by the European Commission. According to the Recommendation itself, in order to reconcile investment and competition, wholesale prices should have nonlinear characteristics and be only partly variable with the number of accesses. We demonstrate that a cost standard for the economic replicability test that implies fully fixed and variable cost recovery for the access seeker, including the total wholesale price, would be incompatible with the economics of NGA networks and that such a test would deter NGA investment. Therefore the cost standard for the economic replicability test should include only the variable part of the wholesale prices. However, we underline that during a transition phase, until competitors have secured access to NGA infrastructure, a temporary second test called the competition migration test should be added to ensure incumbent NGA retail prices do not foreclose copper-based efficient entrants. The tests we propose surpass the limits of the ladder of investment theory by including the business migration effect developed by Bourreau et al. (2012).
    Keywords: regulation
    Date: 2014–07–04
  2. By: Marco D'Errico; Gulnur Muradoglu; Silvana Stefani; Giovanni Zambruno
    Abstract: Opinions and beliefs determine the evolution of social systems. This is of particular interest in finance, as the increasing complexity of financial systems is coupled with information overload. Opinion formation, therefore, is not always the result of optimal information processing. On the contrary, agents are boundedly rational and naturally tend to observe and imitate others in order to gain further insights. Hence, a certain degree of interaction, which can be envisioned as a network, occurs within the system. Opinions, the interaction network and prices in financial markets are then heavily intertwined and influence one another. We build on previous contributions on adaptive systems, where agents have hetereogenous beliefs, and introduce a dynamic confidence network that captures the interaction and shapes the opinion patterns. The analytical framework we adopt for modeling the interaction is rooted in the opinion dynamics problem. This will allow us to introduce a nonlinear model where the confidence network, opinion dynamics and price formation coevolve in time. A key aspect of the model is the classification of agents according to their topological role in the network, therefore showing that topology matters in determining how of opinions and prices will coevolve. We illustrate the dynamics via simulations, discussing the stylized facts in finance that the model is able to capture. Last, we propose an empirical validation and calibration scheme that makes use of social network data.
    Date: 2014–08
  3. By: Sjaak Hurkens; Angel L. López
    Abstract: European and the US mobile communication services markets have developed in rather different ways. There are striking differences in termination regulation and retail pricing models and one may wonder why this occurred and whether either of the markets outperforms the other in terms of efficiency and/or profitability. We address these issues by analyzing a symmetric oligopoly model in which firms are able, but not obliged, to charge subscribers for receiving and placing calls, may discriminate between on- and off-net calls and may request a monthly subscription fee. We show that a continuum of equilibria exist for any reciprocal termination rate, some of which resemble the European business model (with zero charges for reception) while others resemble the US business model (with equal prices for placing and receiving calls). We show that under neither of these business models full efficiency can be achieved. Comparing the European business model with termination regulated at cost to the US business model with voluntary Bill and Keep arrangements we show that the European scenario is more efficient when call externality is modest, and more profitable when either call externality is modest and call demand elasticity high or call externality high and call demand elasticity low. Our predictions are consistent both with observed network operators’ opposition to lowering termination rates in Europe and with voluntary agreements to Bill and Keep arrangements in the US.
    Keywords: access pricing, interconnection, regulation, telecommunications, networks, rational expectations
    JEL: D43 L13 L51 L96
    Date: 2014–07
  4. By: Casimir Lorenz; Clemens Gerbaulet
    Abstract: The European electricity system is undergoing significant changes, not only with respect to developments in generation and networks but also the arrangements for the operation of the system. These are specified in the Network Codes endorsed by regulators, network operators and the European Commission with the objective to create an \Internal Energy Market". In 2013, European network operators formulated the Network Code on Electricity Balancing (NC EB) which foresees arrangements to foster cross-border exchange of balancing services with the objective to lower overall costs and to increase social welfare. Assuming that Switzerland adopts the \Electricity Agreement" which would make EU Electricity rulings binding also in Switzerland, we perform an quantitative analysis of the region consisting of Switzerland, Austria, and Germany. To conduct our analysis, we use an electricity market model with a detailed representation of power plants, scheduled power withdrawals and localized imbalances leading to the need to reserve balancing capacity and activate balancing energy. We consider different levels of integration, as outlined in the NC EB. Our results show that coordinated procurement and activation of balancing services lead to cost decreases, but at the same time distributional effects, which might need to be compensated are incurred.
    Keywords: balancing energy markets, regional cooperation, network code electricity balancing
    JEL: C61 L94 Q40
    Date: 2014
  5. By: Eleonora Patacchini (Cornell University, EIEF and CEPR); Edoardo Rainone (Banca d'Italia and Università di Roma "La Sapienza")
    Abstract: This paper studies the importance of social interactions for the adoption of financial products. We exploit a unique dataset of friendships among United States students and a novel estimation strategy that accounts for possibly endogenous network formation. We find that not all social contacts are equally important: only those with a long-lasting relationship influence financial decisions. Moreover, the correlation in agents' behavior only arises among long-lasting ties in cohesive network structures. This evidence is consistent with an important role of trust in financial decisions. Repeated interactions generate trust among agents, which in turn aggregate in tightly knit groups. When agents have to decide whether or not to adopt a financial instrument they face a risk and might place greater value on information coming from agents they trust. These results can help to understand the growing importance of face-to-face social contacts for financial decisions.
    Date: 2014
  6. By: Christoph Aymanns; Co-Pierre Georg
    Abstract: When banks choose similar investment strategies the financial system becomes vulnerable to common shocks. We model a simple financial system in which banks decide about their investment strategy based on a private belief about the state of the world and a social belief formed from observing the actions of peers. Observing a larger group of peers conveys more information and thus leads to a stronger social belief. Extending the standard model of Bayesian updating in social networks, we show that the probability that banks synchronize their investment strategy on a state non-matching action critically depends on the weighting between private and social belief. This effect is alleviated when banks choose their peers endogenously in a network formation process, internalizing the externalities arising from social learning.
    Date: 2014–08

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