nep-net New Economics Papers
on Network Economics
Issue of 2016‒10‒09
thirteen papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Reimbursing Consumers' Switching Costs in Network Industries By Jiawei Chen; Michael Sacks
  2. Effectiveness of Paid Search Advertising: Experimental Evidence By Weijia (Daisy) Dai; Michael Luca
  3. Less than Zero? The Economic Impact of Zero Rating on Content Competition By Soohyun Cho; Liangfei Qiu; Subhajyoti Bandyopadhyay
  4. Disentangling Social Capital: Lab-in-the-Field Evidence on Coordination, Networks, and Cooperation By Sandra Polania-Reyes
  5. On the Emergence of Scale-free Production Networks By Stanislao Gualdi; Antoine Mandel
  6. A hybrid approach to assess systemic risk in financial networks By Daniele Petrone; Vito Latora
  7. Assessing and Quantifying Local Network Effects in an Online Dating Market By Gordon Burtch; Jui Ramaprasad
  8. Bitcoin Literature: A Co-word Analysis By John Liu
  9. Attack-Aware Cyber Insurance of Interdependent Computer Networks By Rui Zhang; Quanyan Zhu
  10. Dynamic Coalitions and Communication: Public versus Private Negotations By Baron, David P.; Bowen, Renee; Nunnari, Salvatore
  11. Information Management in Smart Grids - the need for decentralized governance approaches By Marius Buchmann
  12. Exact P-Values for Network Interference By Athey, Susan; Eckles, Dean; Imbens, Guido W.
  13. Autonomous coalitions By Stéphane Gonzalez; Michel Grabisch

  1. By: Jiawei Chen (Department of Economics, University of California, Irvine, 3151 Social Science Plaza, Irvine, CA 92697, USA); Michael Sacks (Department of Economics, West Virginia University, 1601 University Ave., PO Box 6025, Morgantown, WV 26506-6025, USA)
    Abstract: This paper investigates firms' decisions to reimburse consumers' switching costs in network industries. Prior literature finds that switching costs incentivize firms to harvest their locked-in consumers rather than price aggressively for market dominance, resulting in a lower market concentration. Using a dynamic duopoly model, we show that this result is reversed if firms have the option to reimburse consumers' switching costs. In that case the larger firm offers a bigger reimbursement to switching consumers than the smaller firm does, as an additional instrument to propel itself to market dominance. Consequently, an increase in switching cost increases market concentration. Compared to the case without reimbursements, allowing firms the option to reimburse results in greater consumer welfare despite having a much higher market concentration. Consumers' benefits from a larger network and switching cost reimbursement outweigh the higher price charged by a dominant firm.
    Keywords: network goods, price discrimination, reimbursement, switching costs
    JEL: L11 L13
    Date: 2016–09
  2. By: Weijia (Daisy) Dai (Lehigh University); Michael Luca (Harvard Business School, Negotiation, Organizations & Markets Unit)
    Abstract: Paid search has become an increasingly common form of advertising, comprising about half of all online advertising expenditures. To shed light on the effectiveness of paid search, we design and analyze a large-scale field experiment on the review platform The experiment consists of roughly 18,000 restaurants and 24 million advertising exposures - randomly assigning paid search advertising packages to more than 7,000 restaurants for a three-month period, with randomization done at the restaurant level to assess the overall impact of advertisements. We find that advertising increases a restaurant's Yelp page views by 25% on average. Advertising also increases the number of purchase intentions - including getting directions, browsing the restaurant's website, and calling the restaurant - by 18%, 9%, and 13% respectively, and raises the number of reviews by 5%, suggesting that advertising also affects the number of restaurant-goers. All advertising effects drop to zero immediately after the advertising period. A back of the envelope calculation suggests that advertising would produce a positive return on average for restaurants in our sample.
    Date: 2016–10
  3. By: Soohyun Cho (Rutgers Business School, Rutgers, The State University of New Jersey, NJ, USA); Liangfei Qiu (Warrington College of Business, University of Florida, FL, USA); Subhajyoti Bandyopadhyay (Warrington College of Business, University of Florida, FL, USA)
    Abstract: One emerging business model for Internet service providers (ISPs) is to allow content providers (CPs) to subsidize Internet access for end consumers. In the present study, we develop a game-theoretical model to analyze the effects of this sponsorship of consumer data usage. The findings indicate that for an ISP, its optimal network management choice of data sponsorship largely hinges on specific market conditions such as the revenue rates of CPs and the fit cost for consumers. If the fit cost is low, the ISP will either allow both CPs to subsidize consumers’ Internet access, or allow only the more competitive CP to subsidize, depending on the CPs’ per-consumer revenue generation rates. If the fit cost is high, it is in the ISP’s interest not to allow any subsidization. The study also identifies the conditions under which an ISP’s network management choices of data sponsorship deviate from the social optimum. By identifying additional revenue models, these findings have direct implications for the telecom industry, for online content providers competing for customer loyalty, and for policymakers vested in this issue.
    Keywords: Internet service provider, online content provider, usage subsidization, consumer surplus, social welfare
    JEL: C72 D43 L44
    Date: 2016–09
  4. By: Sandra Polania-Reyes
    Abstract: Although social capital has been considered of the utmost importance for development it remains a complex and elusive concept. Different dimensions of social capital form part of the puzzle: cooperation is an individual other-regarding preference; social norms stem from beliefs about others' behavior; and the formation of such beliefs is mediated by attributes of the social network. To disentangle social capital we conduct an artefactual field experiment with 714 households at the inset of a Conditional Cash Transfer program in an urban context. To our knowledge this is the first paper that disentangles cooperation from coordination by conducting a minimum effort coordination game with Pareto ranked equilibria. Willingness to cooperate is teased out using a public goods game. By controlling for the density of network information we capture the role of connections, which is the third element of the mixture. We also look at the relation between our experimental data and traditional survey measures of social capital. Our identification strategy allows us to assess whether exposure to the program could be helping individuals overcome strategic uncertainty and select the most efficient equilibrium in the coordination game. The regressions suggest that the program helps overcome the coordination failure through different channels. In particular, the evidence suggests there is a spillover effect of the monetary incentive as it facilitates a social norm, which itself allows individuals to overcome the coordination failure. We rule out confounding factors such as individual socio-economic characteristics, social capital accumulation, willingness to cooperate and connectivity.
    Date: 2016
  5. By: Stanislao Gualdi (CentraleSupélec); Antoine Mandel (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: We propose a simple dynamical model of the formation of production networks among monopolistically competitive firms. The model subsumes the standard general equilibrium approach a la Arrow-Debreu but displays a wide set of potential dynamic behaviors. It robustly reproduces key stylized facts of firms' demographics. Our main result is that competition between intermediate good producers generically leads to the emergence of scale-free production networks.
    Keywords: Macroeconomic Modelling,Agent-based Computational Economics
    Date: 2016–09–19
  6. By: Daniele Petrone; Vito Latora
    Abstract: We propose a credit risk approach in which financial institutions, modelled as a portfolio of risky assets characterized by a probability of default and a correlation matrix, are the nodes of a network whose links are credit exposures that would be partially lost in case of neighbours' default. The systemic risk of the network is described in terms of the loss distribution over time obtained with a multi-period Montecarlo simulation process, during which the nodes can default, triggering a change in the probability of default in their neighbourhood as a contagion mechanism. In particular, we have considered the expected loss and introduced new measures of network stress called PDImpact and PDRank. They are expressed in monetary terms as the already known DebtRank and can be used to assess the importance of a node in the network. The model exhibits two regimes of 'weak' and 'strong' contagion, the latter characterized by the depletion of the loss distribution at intermediate losses in favour of fatter tails. Also, in systems with strong contagion, low average correlation between nodes corresponds to larger losses. This seems at odds with the diversification benefit obtained in standard credit risk models. Results suggest that the credit exposure network of the European global systemically important banks is in a weak contagion regime, but strong contagion could be approached in periods characterized by extreme volatility or in cases where the financial institutions are not adequately capitalized.
    Date: 2016–10
  7. By: Gordon Burtch (University of Minnesota, Carlson School of Management, Information & Decision Sciences Department, 321 19th Ave. S., Minneapolis, MN 55408, USA); Jui Ramaprasad (McGill University, Desautels Faculty of Management, 1001 Rue Sherbrooke O, Montréal, QC H3A 1G5, Canada)
    Abstract: We empirically examine and quantify network effects on a large online dating platform in Brazil. We consider the effects of a seeding intervention by the platform operator, wherein it acquired its primary competitor and subsequently imported the competitor’s 150,000 user accounts over a 3-day period. The acquisition thus constitutes a large exogenous shock the composition of the acquiring platform’s user base. We estimate the effect of the shock on the rate of subsequent enrollments and exits amongst heterosexual users across 120 cities. Bearing in mind that the purchased users were exclusively heterosexual, we employ a difference-in-differences specification in which homosexual enrollment and exit rates serve as plausible controls. Our estimates indicate that the treatment increased the rates of both enrollment and exit, for both genders, with a net positive effect that translated to a 22% increase in short-term revenue for the platform. Further, we find that the response amongst male users was significantly stronger. When we consider that female participation was being fully subsidized by the acquiring platform, this result is consistent with the idea that subsidies and seeding strategies are substitutes, rather than complements. Finally, we explore nuances of the observed effects, quantifying local features. In particular, we show that the treatment effect varied significantly, depending on age differences and the degree of co-location between new and existing users.
    Keywords: online dating, network effects, natural experiment, differences in differences,
    JEL: L14
    Date: 2016–08
  8. By: John Liu (National Taiwan University of Science and Technology)
    Abstract: A technical article in 2008 and the follow-up open-source software in 2009 released by Satoshi Nakamoto have modified the concept of currency and seem to continue affecting our economic and financial thinking. In less than 8 years, bitcoin, a digital currency, is not only accepted as a mean of payment but also traded in numerous ‘bitcoin exchanges’, which have accumulated a market capitalization of around 10.7 billion U.S. dollar. The phenomenon raised the interest of scholars across wide disciplines including finance, economics, law, and computer science. Research articles regarding bitcoin has gradually formed a growing body of literature, which reflects the state of the art of bitcoin research. However, there is no systematic survey of this literature up to now. The purpose of this study is to fill the gap by systematically surveying the bitcoin literature in the hope to uncover the main discussion topics and made suggestions for future research. We collect a total of 253 articles directly related to bitcoin from the Scopus database. In addition to providing basic descriptive statistics of this dataset, we apply co-word analysis to separate the literature into groups. This is done by establishing a network in which articles are nodes and co-usage of the key terms links these articles. The network is then separated into groups based on nodes’ similarity in their connectivity. The result is a division of the articles into three groups each contain distinct discussion topics. The first group is a pool of technological articles which elaborates on improving various aspects of bitcoin technology. The second group focuses on bitcoin’s impacts to existing financial system and real economy. The discussions in the third group call for a legal framework to regulate bitcoin and other digital currency. In the end, we model the bitcoin research in a PEST (political, economic, social, and technological) analysis structure and suggest that the influence of bitcoin and the associated technology on society as a whole is a big gap waiting to be filled in future research.
    Keywords: bitcoin, digital currency, cryptocurrency, literature survey, co-word analysis
    JEL: G00 E50 K40
  9. By: Rui Zhang (Department of Electrical and Computer Engineering, Tandon School of Engineering, New York University, USA); Quanyan Zhu (Department of Electrical and Computer Engineering, Tandon School of Engineering, New York University, USA)
    Abstract: Cyber insurance is a valuable approach to mitigate further the cyber risk and its loss in addition to the deployment of technological cyber defense solutions such as intrusion detection systems and firewalls. An effective cyber insurance policy can reduce the number of successful cyber attacks by incentivizing the adoption of preventative measures and the implementation of best practices of the users. To study cyber insurance in a holistic manner, we first establish a bi-level game-theoretic model that nests a zero-sum game in a moral-hazard type of principal-agent game to capture complex interactions between a user, an attacker, and the insurer. The game framework provides an integrative view of the cyber insurance and enables a systematic design of incentive compatible and attack-aware insurance policy. The framework is further extended to study a network of users and their risk interdependencies. We completely characterize the equilibrium solutions of the bi-level game. Our analytical results provide a fundamental limit on insurability, predict the Peltzman effect, and reveal the principles of zero operating profit and the linear insurance policy of the insurer. We provide analytical results and numerical experiments to corroborate the analytical results and demonstrate the network effects as a result of the strategic interactions among three types of players.
    Keywords: Cyber Insurance, Network Security, Moral Hazard, Information Asymmetry, Network Effects, Security Games, Mechanism Design
    JEL: G22 D80 D86
    Date: 2016–09
  10. By: Baron, David P. (Stanford University); Bowen, Renee (Stanford University); Nunnari, Salvatore (Bocconi University)
    Abstract: We present a laboratory experiment to study the formation of dynamic coalitions in a bargaining setting where the current status quo policy is determined by the policy implemented in the previous period. Our main experimental treatment is the ability of subjects to negotiate with one another through unrestricted cheap-talk communication before a proposal comes to a vote. We compare committees with no communication, committees where communication is public and messages are observed by all committee members, and committees where communication is private and any committee member can send private messages to any other committee member. We find that the ability to communicate has a significant impact on outcomes and coalitions. When communication is public, committees more frequently agree on outcomes which give a significant fraction of the resources to every member. With private communication, we observe a significant increase in the share of allocations that give a positive amount to a minimal winning coalition. When either type of communication is allowed, dynamic coalitions emerge more frequently and majoritarian coalitions last longer. The content of communication is correlated with outcomes and with the persistence of a dynamic coalition. These findings suggest a coordination role for communication that varies with the mode of communication.
    Date: 2015–12
  11. By: Marius Buchmann
    Abstract: Information management secures the efficient exchange of data (e.g. from smart metering) in smart grids. Currently, national as well as regional information management systems are being developed. We discuss how the size of an information management system, i.e. the region covered by and the number of users connected to it, has an influence on the level of innovation in the process of the data exchange. Based on insights from the theory of fiscal federalism we argue that neither of the extremes of national (central) and decentralized governance approaches for information management will be optimal. We discuss how the market can determine the optimal degree of decentralization. If information management shall enable smart grids, then we show that the network operator needs to be able to incentivize network users to join and participate in an information management system to internalize externalities. Then, the size of the governance of information management systems will be linked to the network areas on the distribution grid level.
    Keywords: Smart Grid, Information Management, data exchange, fiscal federalism, size
    JEL: L12 L51 L94
    Date: 2016–09
  12. By: Athey, Susan (Stanford Unviersity); Eckles, Dean (Facebook); Imbens, Guido W. (Stanford University)
    Abstract: We study the calculation of exact p-values for a large class of non-sharp null hypotheses about treatment effects in a setting with data from experiments involving members of a single connected network. The class includes null hypotheses that limit the effect of one unit's treatment status on another according to the distance between units; for example, the hypothesis might specify that the treatment status of immediate neighbors has no effect, or that units more than two edges away have no effect. We also consider hypotheses concerning the validity of sparsification of a network (for example based on the strength of ties) and hypotheses restricting heterogeneity in peer effects (so that, for example, only the number or fraction treated among neighboring units matters). Our general approach is to define an artificial experiment, such that the null hypothesis that was not sharp for the original experiment is sharp for the artificial experiment, and such that the randomization analysis for the artificial experiment is validated by the design of the original experiment.
    JEL: C14 C21 C52
    Date: 2015–06
  13. By: Stéphane Gonzalez (Université Jean Monnet - Saint-Etienne, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Michel Grabisch (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: We consider in this paper solutions for TU-games where it is not assumed that the grand coalition is necessarily the final state of cooperation. Partitions of the grand coalition, or balanced collections together with a system of balancing weights interpreted as a time allocation vector are considered as possible states of cooperation. The former case corresponds to the c-core, while the latter corresponds to the aspiration core or d-core, where in both case, the best configuration (called a maximising collection) is sought. We study maximising collections and characterize them with autonomous coalitions, that is, coalitions for which any solution of the d-core yields a payment for that coalition equal to its worth. In particular we show that the collection of autonomous coalitions is balanced, and that one cannot have at the same time a single possible payment (core element) and a single possible configuration. We also introduce the notion of inescapable coalitions, that is, those present in every maximising collection. We characterize the class of games for which the sets of autonomous coalitions, vital coalitions (in the sense of Shellshear and Sudhölter), and inescapable coalitions coincide, and prove that the set of games having a unique maximising coalition is dense in the set of games.
    Keywords: cooperative game,core,balancedness,c-core,aspiration core,coalition formation,autonomous coalitions JEL Classification: C71
    Date: 2015

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