Essays on the economics of networks and social relations

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School of Business | Doctoral thesis (article-based) | Defence date: 2005-12-07
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v, 163, [2] s.
Acta Universitatis oeconomicae Helsingiensis. A, 263
Economic networks are ubiquitous and their in‡uence on economic behaviour is far from trivial. This dissertation contributes to the economic theory of networks in three aspects. 1) Network models are persistently hampered by the problem of multiplicity of equi- libria. Existing literature has dealt with the problem in an ad hoc manner. I carry out a comprehensive analysis on the conditions for uniqueness in a monopoly pricing model with network externalities. The conditions di¤er under perfect and incomplete informa- tion. Under perfect information, the relative strength of externalities has to be restricted. This implies that consumers’ buying behaviour needs to be driven by non-network as- pects. In contrast, the relative strength of externalities does not have to be restricted in order to obtain a unique equilibrium under incomplete information. The perfect and incomplete information regimes yield equilibria that di¤er qualitatively. The monopoly price is higher under incomplete information. Equilibrium pro…ts are decreasing in un- certainty. Consumer surplus also decreases in uncertainty, but only if the absolute level of uncertainty is already low. 2) The conventional model of network externalities assumes, implicitly, a complete graph structure, i.e. total connectedness of interpersonal relations. However, the map- ping of personal social contacts seldom quali…es as a complete graph. In general, some people have more contacts than others, and some contacts are more important than others. Such topological asymmetry has been overlooked in network externalities literature. The complete graph assumption greatly facilitates the analysis, but at the same time, the neg- ligence of the topology of the network can result in a serious exaggeration of the network’s value. I analyse how both the network size and topology a¤ect monopoly pricing. The result is that the topological e¤ect dominates the size e¤ect, so the monopolist always incorporates the network’s topology in its price. Consequently, asymmetric topologies produce distributional surplus e¤ects thanks to the monopoly’s pricing strategy. 3) Technological change is rapid in many network industries because …rms regard technological leadership as a competitive advantage. The production of new technology is imperfectly appropriable as part of new knowledge spills over to rivals. Hence, the research and development (R&D) produces externalities. I …ll the gap between strategic R&D and network models by analysing a duopoly model where consumers obtain network externalities, and the …rms perform imperfectly appropriable R&D in order to cut down production costs. The interplay between technological and network externalities alters the general results of pure strategic R&D and networks models. In an asymmetric set- up, the disadvantaged duopolist increases its R&D e¤orts and lowers its price under a marginal increase in spillovers or in network compatibility. This happens when R&D and …rm-speci…c networks carry high strategic value.
Supervising professor
Ilmakunnas, Pekka, professor
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