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A Marginalist Model of Network Formation

Listed author(s):
  • Olaizola Ortega, María Norma
  • Valenciano Llovera, Federico

We develop a network-formation model where the quality of a link depends on the amount invested in it and is determined by a link-formation "technology" , an increasing strictly concave function which is the only exogenous ingredient in the model. The revenue from the investments in links is the information that the nodes receive through the network. Two approaches are considered. First, assuming that the investments in links are made by a planner, the basic question is that of the efficient investments, either relative to a given infrastructure (i.e. a set of feasible links) or in absolute terms. It is proved that efficient networks belong to a special class of weighted nested split graph networks. Second, assuming that links are the result of investments of the node-players involved, there is the question of stability in the underlying network-formation game, be it restricted to a given infrastructure or unrestricted. Necessary and sufficient conditions for stability of the complete and star networks, and nested split graph networks in general, are obtained.

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File URL: https://addi.ehu.es/handle/10810/19437
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Paper provided by Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I in its series IKERLANAK with number Ikerlanak;2016-99.

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Date of creation: 18 Aug 2016
Handle: RePEc:ehu:ikerla:19437
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Order Information: Postal: Dpto. de Fundamentos del Análisis Económico I, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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  1. Zenou, Yves & König, Michael D. & Tessone, Claudio J., 2014. "Nestedness in networks: A theoretical model and some applications," Theoretical Economics, Econometric Society, vol. 9(3), September.
  2. Bloch, Francis & Dutta, Bhaskar, 2009. "Communication networks with endogenous link strength," Games and Economic Behavior, Elsevier, vol. 66(1), pages 39-56, May.
  3. Belhaj, Mohamed & Bervoets, Sebatian & Deroïan, Frédéric, 2016. "Efficient networks in games with local complementarities," Theoretical Economics, Econometric Society, vol. 11(1), January.
  4. Coralio Ballester & Antoni Calvó-Armengol & Yves Zenou, 2006. "Who's Who in Networks. Wanted: The Key Player," Econometrica, Econometric Society, vol. 74(5), pages 1403-1417, 09.
  5. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
  6. Sanjeev Goyal, 2007. "Introduction to Connections: An Introduction to the Economics of Networks," Introductory Chapters,in: Connections: An Introduction to the Economics of Networks Princeton University Press.
  7. Paul Belleflamme & Francis Bloch, 2004. "Market sharing agreements and collusive networks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 387-411, 05.
  8. Goyal, Sanjeev & Joshi, Sumit, 2003. "Networks of collaboration in oligopoly," Games and Economic Behavior, Elsevier, vol. 43(1), pages 57-85, April.
  9. Hojman, Daniel A. & Szeidl, Adam, 2008. "Core and periphery in networks," Journal of Economic Theory, Elsevier, vol. 139(1), pages 295-309, March.
  10. Baetz, Oliver, 2015. "Social activity and network formation," Theoretical Economics, Econometric Society, vol. 10(2), May.
  11. Venkatesh Bala & Sanjeev Goyal, 2000. "original papers : A strategic analysis of network reliability," Review of Economic Design, Springer;Society for Economic Design, vol. 5(3), pages 205-228.
  12. Goyal, Sanjeev & Joshi, Sumit, 2003. "Networks of collaboration in oligopoly," Games and Economic Behavior, Elsevier, vol. 43(1), pages 57-85, April.
  13. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  14. Bramoulle, Yann & Kranton, Rachel, 2007. "Public goods in networks," Journal of Economic Theory, Elsevier, vol. 135(1), pages 478-494, July.
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