Network economics

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The network economics is a field of economics that the impact of network effects examined in the decisions of economic actors regarding the allocation of scarce resources. Her core topics include the influence of network effects on consumer demand , compatibility decisions and standardization, technological progress in highly networked industries, two-sided markets, information networks and intellectual property, and the economics of social networks.

Network economics is to be differentiated from the related terms of network economics , namely network economics and information economics: While network economics is an economic structure in which networks represent the main characteristic, information economics is a specialty of economics that deals with the influence of information (or lack of them) affects economic processes and decisions by economic actors.

The networks relevant for network economics include transport networks , communication networks and energy networks such as the power grid .

history

Network economics has a long tradition as part of the economic scientific body, but only began to become an independent academic discipline within economics in the 1990s. The further development of the discipline is heavily dependent on the development of new technologies and products based on the use of network structures, as well as new network services (e.g. mobile banking ). Another promising research direction in network economics is the improvement of the previous social network models in order to be able to apply them more strongly in an economic context, e.g. to investigate the economics of virtual organizations.

Core issues

Consumer demand under network effects

Consumer preferences show positive (negative) network effects if the consumer benefit increases (decreases), the more consumers use the same or a compatible brand. The same applies to network effects in production. Network effects play an important role in particular for the demand for telecommunications services, where the incentive to join a network increases with the number of potential interlocutors who make the same decision. In economic terms, this is expressed on the one hand in a large number of consumer equilibria, and on the other in coordination problems. The network effect hypothesis has since been tested empirically in various settings, including by Gandal (1994), Economides and Himmelberg (1995) and Brynjolfsson and Kemerer (1996).

Compatibility decisions and standardization

Competing brands are said to be compatible if both can be operated using a common standard. There are three approaches for analyzing compatibility and its effects on consumer benefits: the network externalities approach, the component approach and the software approach. The network economic approach examines in particular the compatibility and incompatibility of products under the influence of network effects. It is noteworthy that in the case of incompatible products, the company with the larger user base charges a higher product price and generates a higher profit than its competitors, that the differences between the equilibrium prices and profits of the respective products increase with the preference of consumers for larger networks and that Price competition increases when consumers place more emphasis on the size of the network, as this leads companies to lower their prices in order to expand their customer network.

Technological progress in networked industries

With regard to technological progress, a primary question is whether the new technology will actually be adopted by consumers or industry, given that many users are already using the existing technology. Ultimately, this question corresponds to a question about the strength of the respective technological network effects. In this context, network economics deals with various topics, including game theory modeling of strategic technology change, the importance of the timing of technological transition and standardization, the sponsorship of new technologies and international standardization. The case that an improved technology is incompatible with an older technology and its economic consequences play a special role here. Another special case of network economics is the attempt to interpret Schumpeter's innovation theory in terms of network economics , in which technological progress in companies plays a key role.

Two-sided markets

The theory of bilateral markets analyzes excess supply and demand between two markets for complementary products and describes self-reinforcing network effects. Such network effects in connection with two-sided markets have been empirically proven for the yellow pages , advertising in magazines and credit card associations. Rysman (2009) points out, however, that the literature on bilateral markets with its focus on price structures is thematically separated from the literature on network effects.

Information networks and intellectual property

The dissemination of information can be conceptualized as a network, whereby the properties of the disseminated information and the technology used for this are of particular importance. The latter becomes even more important when it comes to the reproduction of information: different reproduction technologies can differ in the quality of the copies made with them, which in turn can affect the price structure of the information. Two areas of application of the economics of information networks are on the one hand the neutral to positive influence of libraries on the profits of bookstores and publishers , on the other hand the neutral to positive economic consequences of copying and pirated software as well as the effectiveness of various protection methods .

Economics of Social Networks

The economics of social networks can be subdivided around the three central terms conformity , vanity and snobbery and stands at the interface between economics and sociology. Conformity to the conventions of social networks as an acceptance of economic models explains various social and economic behaviors, the setting of social standards and social exchange behavior when giving gifts. Harvey Leibenstein describes three external effects of social networks in this context: (1) the follower effect and herd behavior , (2) nonconformity and snob effect and (3) Veblen's consumption of validity ( Veblen effect ). Specifically, herd behavior describes how individuals act together in a group without specific leadership and can be interpreted economically as an equilibrium in which each decision maker has the choice to follow either his own signal or previous decision makers; this model is also relevant in explaining product choice to early adopters . Finally, economic models of social networks also serve to explain snobbery, i. H. that state in which the benefit of a consumer decreases the more consumers buy the same product.

criticism

Network economics neglects some typical problems of network building, in particular the fact that participation in networks can be voluntary or quasi-forced. Many entrepreneurs cite the desire for independence as a motive for founding a company, which is not compatible with the often great pressure or actual compulsion to join a network. Actors who themselves have the impression that their network skills or the resources that they can make available to the network are poorly trained avoid networks. The pressure to join is z. B. from associations, chambers or banks, but also from clients or business development agencies. There is also no clear empirical evidence for the superiority of strong ties or weak ties in networks. The importance of this distinction has been the focus of network economics since the work of Mark Granovetter, although its empirical examination is associated with considerable measurement problems. The costs and risks of networking are also likely to be underestimated. A study of networking among entrepreneurs of Turkish origin in London points to the risks of networking through copying business concepts.

Specialized journals

Topics, problems and studies on network economics are increasingly being published in specialized journals . These include the Review of Network Economics (since 2002).

Individual evidence

  1. ↑ Shy, Oz (2011): A Short Survey of Network Economics , in: Review of Industrial Organization, Vol. 38, No. 2, p. 119.
  2. ↑ Nagurney, Anna (2002): Network Economics: An Introduction , Isenberg School of Management, University of Massachusetts.
  3. ↑ Shy, O. (2011): Ibid , p. 36.
  4. ↑ Rohlfs, J. (1974): A theory of interdependent demand for a communications service , in: Bell Journal of Economics and Management Science, Vol. 5, pp. 16-37.
  5. ↑ Gandal, N. (1994): Hedonic price indexes for spreadsheets and an empirical test for network externalities , in: Rand Journal of Economics Vol. 25, pp. 160-170.
  6. ^ Economides, N., C. Himmelberg (1995): Critical mass and network size with application to the US fax market. , in: NYU Stern School of Business Discussion Paper No. EC-95-11.
  7. ^ Brynjolfsson, E., C. Kemerer (1996): Network externalities in microcomputer software: An econometric analysis of the spreadsheet market. , in: Management Science, Vol. 42, pp. 1627-1647.
  8. ^ Katz, M., Carl Shapiro (1985): Network externalities, competition, and compatibility. , in: American Economic Review, Vol. 75, pp. 424-440.
  9. ^ Farrell, J., G. Saloner (1985): Standardization, compatibility, and innovation. , in: Rand Journal of Economics, Vol. 16, pp. 70-83.
  10. ^ Cabral, L. (1990): On the adoption of innovations with 'network' externalities. , in: Mathematical Social Sciences, Vol. 19, No. 3, pp. 299-308.
  11. ↑ Rysman, Marc (2004): Competition between networks: A study of the market for yellow pages. , in: Review of Economic Studies, Vol. 71, pp. 483-512.
  12. ^ Kaiser, U., J. Wright (2006): Price structure in two-sided markets: Evidence from the magazine industry. , in: International Journal of Industrial Organization, Vol. 24, No. 1, pp. 1-28.
  13. ↑ Rysman, Marc (2007): An empirical analysis of payment card usage. , in: Journal of Industrial Economics, Vol. 55, No. 1, pp. 1-36.
  14. ↑ Rysman, Marc (2009): The economics of two-sided markets. , in: Journal of Economic Perspectives, Vol. 23, No. 3, pp. 125-143.
  15. ↑ See also: Varian, Hal, J. Farrell, and Carl Shapiro (2004): The economics of information technology: An introduction. , Cambridge University Press.
  16. ↑ Bakos, Y., E. Brynjolfsson, and D. Lichtman (1999): Shared information goods. , in: Journal of Law and Economics, Vol. 42, No. 1, pp. 117-156.
  17. ↑ Varian, Hal (2000): Buying, sharing and renting information goods. , in: Journal of Industrial Economics, Vol. 48, No. 4, pp. 473-488.
  18. ↑ Oberholzer-Gee, F. and K. Strumpf (2007): The effect of file sharing on record sales: An empirical analysis. , in: Journal of Political Economy, Vol. 115, No. 1, pp. 1-42.
  19. ↑ Peitz, M., P. Waelbroeck (2006): Why the music industry may gain from free downloading - The role of sampling. , in: International Journal of Industrial Organization, Vol. 24, No. 5, pp. 907-913.
  20. ↑ Conner, K., Richard P. Rumelt (1991): Software piracy: An analysis of protection strategies. , in: Management Science, Vol. 37, pp. 125-139.
  21. ↑ Shy, Oz (2007): Dynamic models of religious conformity and conversion: Theory and calibrations. , in: European Economic Review, Vol. 51, No. 5, pp. 1127-1153.
  22. ^ Hayes, R., S. Schaefer (2009): CEO pay and the Lake Wobegon effect. , in: Journal of Financial Economics, Vol. 94, pp. 280-290.
  23. ↑ Young, P. (1996): The economics of convention. , in: Journal of Economic Perspectives, Vol. 10, pp. 105-122.
  24. ↑ Waldfogel, J. (1993): The deadweight loss of Christmas. , in: American Economic Review, Vol. 83, pp. 1328-1336.
  25. ↑ Leibenstein, Harvey (1950): Veblen effects in the theory of consumers demand. , in: Quarterly Journal of Economics, Vol. 64, No. 2, pp. 183-207.
  26. ↑ Banerjee, Abhijit (1992): A simple model of herd behavior. , in: Quarterly Journal of Economics, Vol. 107, pp. 797-817.
  27. ↑ Choi, J. (1997): Herd Behavior, the “penguin effect”, and the suppression of informational diffusion: An analysis of informational externalities and payoff interdependency. , in: Rand Journal of Economics, Vol. 28, No. 3, pp. 407-425.
  28. ↑ Grilo, I., Oz Shy, J. Thisse (2001): Price competition when consumer behavior is characterized by conformity or vanity. , in: Journal of Public Economics, Vol. 80, No. 3, pp. 385-408.
  29. ↑ S. Birley, P. Westhead: A Taxonomy of Business Start-up Reasons and their Impact on Firm Growth and Size. In: Journal of Business Venturing , 9 (1994) 1, pp. 7-31.
  30. ^ P. Witt: 'Entrepreneurs' Networks and the Success of Start-ups. In: Entrepreneurship and Regional Development , 16 (2004) 5, pp. 391-412.
  31. ↑ J. Curran et al. a .: Networks and Small Firms: Constructs, Methodological Strategies, and Some Findings. In: International Small Business Journal , 11 (2003) 2, pp. 13-25.
  32. ↑ David J. Storey, Francis J. Greene: Small Business and Entrepreneurship. Harlow 2010, p. 131.

Specialist literature

  • Philipp Hessinger: Networked Economy and Economic Development. Organizational change, institutional embedding, civil society perspectives. Westdeutscher Verlag, Opladen 2001, ISBN 3-531-13605-4 .
  • Matthew O. Jackson: Social and Economic Networks , Princeton University Press, 2008, ISBN 978-0-691-13440-6 .
  • Oz Shy: A Short Survey of Network Economics. In: Review of Industrial Organization 38.2 (2011), pp. 119-149.