nep-net New Economics Papers
on Network Economics
Issue of 2015‒04‒25
eighteen papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Airline Route Structure Competition and Network Policy By Hugo Emilo Silva; Erik T. Verhoef; Vincent van den Berg
  2. Transfers and Exchange-Stability in Two-Sided Matching Problems By Emiliya Lazarova; Peter Borm; Arantza Estévez-Fernández
  3. Social Network Effects and Green Consumerism By Dominic Hauck; Erik Ansink; Jetske Bouma; Daan van Soest
  4. Price Differentiation and Discrimination in Transport Networks By Adriaan Hendrik van der Weijde
  5. Financial Contagion in Networks By Cabrales, Antonio; Gale, Douglas; Gottardi, Piero
  6. Identifying Cross-Sided Liquidity Externalities By Johannes A. Skjeltorp; Elvira Sojli; Wing Wah Tham
  7. 1On endogenous Stackelberg leadership: The case of horizontally differentiated duopoly and asymmetric net work compatibility effects By Tsuyoshi Toshimitsu
  8. The Geographical Network of Bank Organizations: Issues and Evidence for Italy By Luca Papi; Emma Sarno; Alberto Zazzaro
  9. Shapley-Based Stackelberg Leadership Formation in Networks By Belik, Ivan; Jörnsten, Kurt
  10. Cooperative Games on Accessible Union Stable Systems By Encarnación Algaba; Rene van den Brink; Chris Dietz
  11. Electricity Networks Privatization in Australia: An Overview of the Debate By Rabindra Nepal; John Foster
  12. The Formation of a Core Periphery Structure in Heterogeneous Financial Networks By Daan in 't Veld; Marco van der Leij; Cars Hommes
  13. Restructuring the International Textile Production and Trade Network. The Role of Italy and Portugal. By Marlies Schütz; Nicole Palan
  14. Network proximity in the geography of research collaboration By BERGE Laurent
  15. The Great Divergence: A Network Approach By Ines Lindner; Holger Strulik
  16. Superstars need Social Benefits: An Experiment on Network Formation By Boris van Leeuwen; Theo Offerman; Arthur Schram
  17. Social coordination with locally observable types By Ennio Bilancini; Leonardo Boncinelli
  18. Diffusion of Behavior in Network Games Orchestrated by Social Learning By Jia-Ping Huang; Maurice Koster; Ines Lindner

  1. By: Hugo Emilo Silva (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam); Vincent van den Berg (VU University Amsterdam)
    Abstract: This paper resulted in a publication in <A HREF=""><I>Transportation Research Part B: Methodological</I></A>, 2014, 67, 320-343.<P> This paper studies whether a regulator needs to correct the route structure choice by carriers with market power in the presence of congestion externalities, in addition to correct their pricing. We account for passenger benefits from increased frequency, passenger connecting costs, airline endogenous hub location and route structure strategic competition. We find that, for some parameters, an instrument directly aimed at regulating route structure choice may be needed to maximize welfare, in addition to per-passenger and per-flight tolls designed to correct output inefficiencies. This holds true when the regulator is constrained to set non-negative tolls, but also for the case of unconstrained tolling.
    Keywords: Route structure competition, Aviation policy, Hub-and-spoke networks, Fully-connected networks
    JEL: H2 L13 L93 R4
    Date: 2013–11–26
  2. By: Emiliya Lazarova (University of East Anglia, United Kingdom); Peter Borm (Tilburg University, the Netherlands); Arantza Estévez-Fernández (VU University Amsterdam, the Netherlands)
    Abstract: In this paper we consider one-to-many matching problems where the preferences of the agents involved are represented by monetary reward functions. We characterize Pareto optimal matchings by means of contractually exchange stability and matchings of maximum total reward by means of compensation exchange stability. To conclude, we show that in going from an initial matching to a matching of maximum total reward, one can always provide a compensation schedule that will be ex-post stable in the sense that there will be no subset of agents who can all by deviation obtain a higher reward. The proof of this result uses the fact that the core of an associated compensation matching game with constraints is nonempty.
    Keywords: matching, Pareto optimal matching, contractually exchange stability, compensation stability, compensation schedule
    JEL: C78 C71 D60
    Date: 2014–07–08
  3. By: Dominic Hauck (VU University Amsterdam); Erik Ansink (VU University Amsterdam); Jetske Bouma (PBL Netherlands Environmental Assessment Agency); Daan van Soest (Tilburg University)
    Abstract: One of the drivers of green consumerism are social network externalities that are associated with buying 'green' because green consumerism is fashionable, or because of reputation effects. We analyze how the strength of this social network effect impacts green consumerism, environmental externalities and total welfare. We discuss a model where products are differentiated according to their environmental quality, where the production of green products generates positive externalities to all, and where those consumers purchasing a green product variety receive the additional benefits of being a member of the network of green consumers. Depending on the strength of the social network effect, we show that (a) firms may produce lower quality, (b) the market may generate fewer positive environmental externalities, and (c) total welfare may deteriorate. The main policy implication is that if there is a network effect, regulators should choose a stricter minimum environmental quality standard.
    Keywords: Quality Differentiation, Social Network Effect, Minimum Environmental Quality Standard
    JEL: D11 L15 Q31
    Date: 2014–12–04
  4. By: Adriaan Hendrik van der Weijde (VU University Amsterdam)
    Abstract: This paper analyzes the effects of price differentiation and discrimination by a monopolistic transport operator, which sets fares in a congestible network. Using three models, with different spatial structures, we describe the operator’s optimal strategies in an unregulated market, a market where price differentiation is not allowed (i.e., ticket prices must be the same for all users), and a market where price discrimination is illegal (i.e., ticket prices must only differ with the marginal external costs of users), and analyze the welfare effects of uniform and non-discriminatory pricing policies. The three models allow us to consider three different forms of price differentiation and discrimination in networks: by user class, by origin-destination pair, and by route. We generalize the existing literature, in which groups usually only differ in their value of time, and hence, there is no distinction between differentiation and discrimination. In our models, users may also have different marginal external costs; we show how these two differences interact. We also show how non-differentiated and non-discriminatory policies may increase or decrease welfare, and that non-discrimination can be worse than non-differentiation. The network models show that results obtained for a single-link network can be generalized to a situation where operators price-discriminate or differentiate based on users’ origins and destinations, but not directly to a situation in which differentiation is based on route choices.
    Keywords: price differentiation, price discrimination, transport, networks, congestion
    JEL: L11 L51 L91
    Date: 2014–08–01
  5. By: Cabrales, Antonio; Gale, Douglas; Gottardi, Piero
    Abstract: This paper provides an introduction to the literature on financial contagion in networks. In the first part, we consider contagion via transmission of shocks, i.e. an abrupt drop in the flow of revenue to one firm, which affects other firms connected to it through financial linkages. We then study informational contagion, by which we mean the process whereby a shock to one market is transmitted to other markets by means of information revealed in the first market.
    Date: 2015
  6. By: Johannes A. Skjeltorp (Norges Bank, Norway); Elvira Sojli (Rotterdam School of Management, Erasmus University Rotterdam, Duisenberg school of finance); Wing Wah Tham (Erasmus University Rotterdam)
    Abstract: We study the relevance of the cross-sided externality between liquidity makers and takers from the two-sided market perspective. We use exogenous changes in the make/take fee structure, minimum tick-size and technological shocks for liquidity takers and makers, as experiments to identify cross-sided complementarities between liquidity makers and takers in the U.S. equity market. We find that the externality is on average positive, but it decreases with adverse selection. We quantify the economic significance of the externality by evaluating an exchange's revenue after a make/take fee change.
    Keywords: Liquidity cycle, Liquidity externality; Two-sided markets; Make/take fees
    JEL: G10 G20 G14
    Date: 2013–10–03
  7. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Introducing product compatibility associated with network externalities (hereafter, network compatibility effects) into a horizontally differentiated duopoly model, we consider how network compatibility effects and the level of product substitutability affect endogenous timing decisions in the cases of quantity- and price-setting competition. In particular, we demonstrate the following. First, given asymmetric network compatibility effects between the products of the firms, there is Stackelberg equilibrium where the firm providing a product with a larger network compatibility effect than some certain level of product substitutability emerges as a leader (follower), whereas the firm providing a product with a smaller network compatibility effect than some certain level of product substitutability emerges as a follower (leader) in the case of quantity (price)-setting competition. Second, the Stackelberg equilibrium is Pareto-superior for both firms compared with other equilibria. However, with alternative formulation determining network size, with respect to the endogenous Stackelberg leader−follower relationship, the revers holds.
    Keywords: Stackelberg equilibrium; Nash equilibrium; leader-follower; product compatibility; network externality; product substitutability; fulfilled expectations; horizontally differentiated products
    JEL: D21 D43 D62 L15
    Date: 2015–04
  8. By: Luca Papi (Università Politecnica delle Marche and Money and Finance Research Group (MoFiR)); Emma Sarno (Università di Napoli “L’Orientale”); Alberto Zazzaro (Università Politecnica delle Marche, MoFiR and CSEF)
    Abstract: The evolution of the banking industry has always been affected by recurrent waves of technological, regulatory and organizational changes. All such changes have significant effects on the spatial organization of banks, the interconnectedness of geographical credit markets and the core-periphery structure of banking industry. In this chapter, we review the literature on the effects of geographical distances between the key actors of the credit market (the borrowing firm, the lending branch, the lending bank, and rival banks) on lending relationships and interbank competition. Using the metrics and graph techniques for network analysis we then provide evidence concerning the evolving geographical network of bank organizations in Italy. JEL Classification: G2
    Keywords: Distances in credit markets; spatial organization of banks; network analysis.
    Date: 2015–04–20
  9. By: Belik, Ivan (Dept. of Business and Management Science, Norwegian School of Economics); Jörnsten, Kurt (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: In the given research we study a leadership formation of the most influential nodes in networks. Specifically, we analyze the competition between a leader and a follower based on the Stackelberg leadership model. Applying the concept of Shapley value to measure node’s importance, we represent the mechanism of Shapley-based Stackelberg leadership formation in networks. The approach is tested and represented in tabular and graphical formats.
    Keywords: Stackelberg competition; Shapley value; leadership; networks analysis
    JEL: C00 C60 C61 Z13
    Date: 2015–04–10
  10. By: Encarnación Algaba (Escuela Técnica Superior de Ingenierá, Sevilla, Spain); Rene van den Brink (VU University Amsterdam); Chris Dietz (VU University Amsterdam)
    Abstract: Agents participating in different kind of organizations, usually take different positions in some relational structure. The aim of this paper is to introduce a new framework taking into account both communication and hierachical features derived from this participation. In fact, this new set or network structure unifies and generalizes well-known models from the literature, such as communication networks and hierarchies. We introduce and analyze accessible union stable systems where union stability reflects the communication network and accessibility describes the hierarchy. Particular cases of these new structures are the sets of connected coalitions in a communication graph, antimatroids (and therefore also sets of feasible coalitions in permission structures) and augmenting systems which have numerous applications in the literature. We give special attention to th e class of cycle-free accessible union stable systems. We also consider cooperative games with restricted cooperation where the set of feasible coalitions is an accessible union stable system, and provide an axiomatization of an extension of the Shapley value to this class of games.
    Keywords: union stable system, accessibility, cooperative TU-game, Shapley value
    JEL: C71
    Date: 2013–12–19
  11. By: Rabindra Nepal (School of Economics, The University of Queensland); John Foster (School of Economics, The University of Queensland)
    Abstract: The debate on electricity networks privatization in the Australian National Electricity Market is an important public policy concern but remains unsettled. This article reviews and compares the economic performance between the privately and state-owned electricity networks in Australia across three dimensions encompassing prices, quality and investment. The comparative analysis suggests that privately owned networks are not worse off than the state-owned networks in terms of performance. However, international empirical evidences indicate that the efficiency gains to consumers from electricity networks privatization will depend on the underlying regulatory regime and regulatory institutional framework. The long-term concerns on future investments, security of supply, climate change and economic regulation of networks will continue to prevail once the short-term efficiency gains from privatization are exhausted. These concerns imply that the role of the state will still be significant, although transformed, even after electricity networks privatization raising questions on the motives of privatization.
  12. By: Daan in 't Veld (University of Amsterdam); Marco van der Leij (University of Amsterdam, and De Nederlandsche Bank, the Netherlands); Cars Hommes (University of Amsterdam, the Netherlands)
    Abstract: Recent empirical evidence suggests that financial networks exhibit a core periphery network structure. This paper aims at giving an economic explanation for the emergence of such a structure using network formation theory. Focusing on intermediation benefits, we find that a core periphery network cannot be unilaterally stable when agents are homogeneous. The best-response dynamics converge to a unique unilaterally stable outcome ranging from an empty to denser networks as the costs of linking decrease. A core periphery network structure can form endogenously, however, if we allow for heterogeneity among agents in size. We show that our model can reproduce the observed core periphery structure in the Dutch interbank market for reasonable parameter values.
    Keywords: financial networks, core periphery structure, network formation models
    JEL: D85 G21 L14
    Date: 2014–07–28
  13. By: Marlies Schütz; Nicole Palan
    Abstract: Production and trade processes in the textile industry have been undergoing tremendous changes in structure due to both changes in technology (i.e. increased mechanization and automation processes) and in the institutional environment (i.e. the assignment of the WTO treaty in 1994). This paper studies the restructuring process in the textile industry from the perspective of two major textile producing countries in the EU15, i.e. Italy and Portugal between the two years 1995 and 2009. As a starting point, a detailed descriptive analysis of the global distribution of the textile industry and changes therein is provided. By means of two international textile trade networks (ITTNs), showing (1) trade in value added and (2) trade in labour, we next discuss spatial trade patterns and changes therein. Focusing on the ITTNs, we then figure out how these countries’ textile industries were affected in terms of specialisation patterns, movements along the global value chain and vertical specialisation. Combining the merits of a multiregional I/O-framework with network analysis both qualitative and quantitative aspects of the experienced restructuring process are figured out. This paper contributes to a better understanding of changes in national economic structures resulting from changes in the institutional and technological change without masking the international context.
    Keywords: International trade network, concentration, textile industry, structural change, network analysis, multiregional input-output model
    JEL: C67 F14 O12
    Date: 2015–04
  14. By: BERGE Laurent
    Abstract: This paper deals with the questions of how network proximity influences the structure of inter-regional collaborations and how it interacts with geography. I first introduce a new, theoretically grounded measure of inter-regional network proximity. Then, I use data on European scientific co-publications in the field of chemistry between 2001 and 2005 to assess those questions. The main findings reveal that inter-regional network proximity is important in determining future collaborations but its effect is mediated by geography. Most importantly, a clear substitution pattern is revealed showing that network proximity benefits mostly international collaborations.
    Keywords: network proximity; gravity model; research collaboration; network formation; co-publication
    JEL: D85 O31 R12
    Date: 2015
  15. By: Ines Lindner (VU University Amsterdam, the Netherlands); Holger Strulik (Georg-August-Universität Göttingen, Germany)
    Abstract: We present a multi-country theory of economic growth in which countries are connected by a network of mutual knowledge exchange. Growth is generated through human capital accumulation and knowledge externalities. The available knowledge in any country depends on its connections to the rest of the world and on the human capital of the countries it is exchanging knowledge with. We show how the diffusion of knowledge through the world explains the evolution of global income inequality. It generates a "Great Divergence", that is increasing world inequality after the take-off of the forerunners of the industrial revolution, followed by a "Great Convergence", that is decreasing world inequality after the take-off of the latecomers of the industrial revolution. Knowledge diffusion through a Small World network produces an extraordinary diversity of individual growth e xperiences of initially identical countries including differentiated take-offs to growth as well as overtaking and falling behind in the course of world development.
    Keywords: networks, knowledge diffusion, economic growth, world income distribution
    JEL: O10 O40 D62 D85 F41
    Date: 2014–03–10
  16. By: Boris van Leeuwen (University of Amsterdam); Theo Offerman (University of Amsterdam); Arthur Schram (University of Amsterdam)
    Abstract: We investigate contributions to the provision of public goods on a network when efficient provision requires the formation of a star network. We provide a theoretical analysis and study behavior in a controlled laboratory experiment. In a 2x2 design, we examine the effects of group size and the presence of (social) benefits for incoming links. We find that social benefits are highly important. They facilitate convergence to equilibrium networks and enhance the stability and efficiency of the outcome. Moreover, in large groups social benefits encourage the formation of superstars: star networks in which the core contributes more than expected in the stage-game equilibrium. We show that this result is predicted by a repeated game equilibrium.
    Keywords: Network formation, networked public goods, peer production, social benefits, open source software
    JEL: C91 D85 H41
    Date: 2013–08–08
  17. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: In this paper we study the typical dilemma of social coordination between a risk- dominant convention and a payoff-dominant convention. In particular, we consider a model where a population of agents play a coordination game over time, choosing both the action and the network of agents with whom to interact. The main novelty with respect to the existing literature is that: (i) agents come in two distinct types, (ii) the interaction with a di.erent type is costly, and (iii) an agent's type is unobservable prior to interaction. We show that when the cost of interacting with a different type is small with respect to the payo. of coordination, then the payoff-dominant convention is the only stochastically stable convention; instead, when the cost of interacting with a different type is large, the only stochastically stable conventions are those where all agents of one type play the payoff-dominant action and all agents of the other type play the risk-dominant action.
    Keywords: coordination, equilibrium selection, stochastic stability, learning, network formation
    JEL: C73 D83
    Date: 2014–12
  18. By: Jia-Ping Huang (VU University Amsterdam); Maurice Koster (University of Amsterdam); Ines Lindner (VU University Amsterdam)
    Abstract: The novelty of our model is to combine models of collective action on networks with models of social learning. Agents are connected according to an undirected graph, the social network, and have the choice between two actions: either to adopt a new behavior or technology or stay with the default behavior. The individual believed return depends on how many neighbors an agent has, how many of those neighbors already adopted the new behavior and some agent-specic cost-benefit parameter. There are four main insights of our model: (1) A variety of collective adoption behaviors is determined by the network. (2) Average inclination governs collective adoption behavior. (3) Initial inclinations determine the critical mass of adoption which ensures the new behavior to prevail. (4) Equilibria and dynamic be- havior changes as we change the underlying network and other parameters. Given the complexity of the system we use a standard technique for estimating the solution.
    Keywords: Diffusion, Social Networks, Social Learning, Tipping, Technology Adoption
    JEL: C72 C73 D83 D85 O33
    Date: 2013–12–20

This nep-net issue is ©2015 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.