New paper posted

I have posted a new paper, co-authored by Owen Sims, on critical nodes in directed networks. It addresses the appropriate definition of what exactly critical nodes or middlemen are in the general class of directed networks. We also discuss the link with contestability in networks.

Visit the network analysis page for more information and PDF files of the paper.

Thinking about networks and platforms

I just posted a new paper with Dimitrios Diamantaras on how middlemen compete in a network environment. We view a middleman here as an explicit provider of a two-sided interaction platform. FRom that a theory of competitive behaviour is developed as ambiguous decision making in a game theoretic framework. Here the middleman is ambiguous whether she is contested in her middleman position or not.

Interestingly we conclude that there emerges a mixed picture. In many cases the middleman will continue to extract maximal rents, but if competition is “normal” and effective, then middlemen can actually engage in a more competitive fashion, as expected through a standard Bertrand-like argument.

Visit the economic theory page for details.

Thinking about the consequences of economic networks

I just posted a new paper on multilateral matching in network economies on the game theory page. This paper is co-authored with Emiliya Lazarova (University of Birmingham) and Pieter Ruys (Tilburg University).

This paper investigates a network economy in which economic agents are connected within a structure of value-generating relationships. Agents are assumed to be able to participate in three types of economic activities: autarkic self-provision; binary matching interactions; and multi-person cooperative collaborations. We introduce two concepts of stability and provide sufficient and necessary conditions on the prevailing network structure for the existence of stable assignments, both in the absence of externalities from cooperation as well as in the presence of size-based externalities. We show that institutional elements such as the emergence of socioeconomic roles and hierarchical leadership structures are necessary for establishing stability and as such support and promote stable economic development.

Investigating network formation under mutual consent

It seems to me there is a lack of game-theoretic modelling of network formation under mutual consent in the relationship building process. To model such a process of mutual consent is rather difficult. The simplest model from the literature is Myerson’s network formation game in which all individuals announce which links they want to build. Subsequently only those links that are supported by both parties are actually formed.

The main problem with this static approach is that the class of networks supported through Nash equilibria in this game is very large. In particular, the empty network (without any links whatsoever) is very strongly supported in this model; it is a strict Nash equilibrium if building links is costly, which is usually the case. My paper with Chakrabarti and Sarangi (2011) reports an exact description of the properties of the equilibrium networks in Myerson’s model under arbitrary cost structures in the link formation process.

In my (now published) paper with Sarangi (2010) we introduce a concept that pulls us away from the conclusion that the empty network is always a strict equilibrium. This alternative concept is founded on modelling a form of trusting behaviour or “confidence” in the brain of the individuals in the link building process. The result is a much smaller class of stable networks, usually not including the empty network. This actually shows that we can support the idea that trust builds meaningful social networks.

The referred papers on network formation under consent are posted on the network formation page at this web site. In particular, this post addresses the material covered in the first two papers posted there.

New research on naive learning in networks

Together with Zhengzheng Pan I am working on how naive economic decision makers operate in complex, multi-layer network structures. In the updated paper that I posted on the game theory research page, we consider how decision makers interact in a network and at the same time observe other decision makers in a separate, but correlated interaction structure. Our main result is that behavioral islands form and that in each of those islands there emerge local conventions. If we add stubborn or persistent individuals, they have an extraordinary large effect on the local conventions that emerge in the behavioral islands that they are member of. All in all, rather interesting insights from a straightforward model that is founded on boundedly rational behavior rather than fully rational optimization.