Report

Teaser, summary, work performed and final results

Periodic Reporting for period 2 - Connections (Oligopoly Markets and Networks)

Teaser

The complex set of relationships amongst economic agents has profound effects on individuals’ behaviour and economic outcomes. Via our connections we learn about new ideas, the quality of products, new investment possibilities and job opportunities. We influence, and are...

Summary

The complex set of relationships amongst economic agents has profound effects on individuals’ behaviour and economic outcomes. Via our connections we learn about new ideas, the quality of products, new investment possibilities and job opportunities. We influence, and are influenced, by our circle of friends. Firms are interconnected in complex processes of production and distribution. A firm’s decisions in a supply chain depend on other firms’ choices in the same supply chain, as well as on firms\' behaviour in competing chains. Research on networks, in the last twenty years or so, has set up a common tool to model and study complex relationships within the economic paradigm. An economic view of networks complements existing sociological and statistical theories of networks. Indeed, it allows us to describe how networks emerge from the strategic interaction of individually rational agents, and to evaluate any possible inefficiency that networks generate. My research proposal enlarges this use of models of networks to economic areas where a network perspective seems to be natural and, most importantly, is needed to gain additional insight on economic phenomena.

Work performed

In sub-project 1, networks are used to model diffusion and adoption of goods. The objectives are to understand how firms incorporate information about consumers\' influence in their marketing strategies—pricing strategy, information usage and product design, and what is the effect on consumers’ welfare. This research contributes to the development of a comprehensive analysis of digital markets and to inform policy makers about the trade-offs in possible regulation. As the result of a sequence of articles, this research has shown that the use of consumers’ information to price products with network effects can be beneficial to consumers and overall welfare. It shows unintended consequences of policies that attempt to increase transparency in the content creation of online influencers, and it points out what are the properties of digital business models in which firms have less incentives to invest in protecting users’ information.


In sub-project 2, networks are used to model how inputs are combined and externalities are aggregated to formulate strategic decisions in markets. Possible applications are supply chains, communication networks, and networks of patents. The objectives are to study firms\' strategic behaviours, like pricing and R&D investments, in a complex process of production and distribution, and to understand the basic network metrics that are useful to describe market power. By addressing these problems we encountered the need to develop new methods to better capture the interplay of networks with strategic choices. The first advancement has been to provide a flexible model and methodology through which progress can be made in concrete and practical economic applications. I, together with my collaborators, are now using these techniques to study optimal taxation in supply chains and strategic investments of multi-product firms. The overall objective here is to provide metrics that can be employed by practitioners to develop optimal strategies (positive objective) and by decision makers and regulators to improve upon existing practice in competition analysis.

Final results

In sub-project 2, our first achievement has been to provide a flexible model and methodology through which progress can be made in concrete and practical economic applications. I, together with my collaborators, are now using these techniques to study optimal taxation in supply chains and strategic investments of multiproduct firms. The overall objective here is to provide metrics that can be employed by practitioners to develop optimal strategies (positive objective) and by decision makers and regulators to improve upon existing practice in competition analysis.