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Stable and Efficient Electronic Business Networks: Key Players and the Dilemma of Peripheral Firms

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  • Kai Sülzle

Abstract

This paper studies a spatial model of electronic business network formation where firms build links based on a cost-benefit analysis. Benefits result from directly and indirectly connected firms in terms of knowledge flows, which are heterogeneous: a “key-player”(e.g. a firm providing an exchange platform in a business-to-business network) provides a higher level of knowledge flows than “peripheral” firms (e.g. tier 3 suppliers in a vertically differentiated industry). For intermediate cost values of link formation, stable andefficient network structures comprise only a subset of the total set of firms, excluding peripheral firms which are most distantly located to the key player. When link formation implies a certain degree of network congestion, the stable and efficient network size issmaller than in a model with bilateral decisions upon link formation between two firms.

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Bibliographic Info

Paper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Papers No. 22.

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Date of creation: 2005
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Handle: RePEc:ces:ifowps:_22

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Keywords: Network formation; business-to-business; spatial model;

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  1. Jackson, Matthew O., 1998. "The Evolution of Social and Economic Networks," Working Papers 1044, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  3. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Deeds, David L. & Hill, Charles W. L., 1996. "Strategic alliances and the rate of new product development: An empirical study of entrepreneurial biotechnology firms," Journal of Business Venturing, Elsevier, vol. 11(1), pages 41-55, January.
  5. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
  6. Robert P. Gilles & Cathleen Johnson, 2000. "original papers : Spatial social networks," Review of Economic Design, Springer, vol. 5(3), pages 273-299.
  7. Francis Bloch, 1995. "Endogenous Structures of Association in Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 537-556, Autumn.
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