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Local Network Effects and Complex Network Structure

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  • Sundararajan Arun

    ()
    (New York University)

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    Abstract

    This paper presents a model of local network effects in which agents connected in a social network each value the adoption of a product by a heterogeneous subset of other agents in their neighborhood, and have incomplete information about the structure and strength of adoption complementarities between all other agents. I show that the symmetric Bayes-Nash equilibria of this network game are in monotone strategies, can be strictly Pareto-ranked based on a scalar neighbor-adoption probability value, and that the greatest such equilibrium is uniquely coalition-proof. Each Bayes-Nash equilibrium has a corresponding fulfilled-expectations equilibrium under which agents form local adoption expectations. Examples illustrate cases in which the social network is an instance of a Poisson random graph, when it is a complete graph, a standard model of network effects, and when it is a generalized random graph. A generating function describing the structure of networks of adopting agents is characterized as a function of the Bayes-Nash equilibrium they play, and empirical implications of this characterization are discussed.

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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

    Volume (Year): 7 (2008)
    Issue (Month): 1 (January)
    Pages: 1-37

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    Handle: RePEc:bpj:bejtec:v:7:y:2008:i:1:n:46

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