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Local Network Effects and Network Structure

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  • Arun Sundararajan

Abstract

This paper presents a model of local network effects in which agents connected in a social network each value adoption by a heterogeneous subset of others, 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 a general adoption game are in monotone strategies, can be strictly Pareto-ranked, and that the greatest equilibrium is uniquely coalition-proof. Each Bayes-Nash equilibrium has a corresponding fulfilled-expectations equilibrium under which agents form local-adoption expectations. Examples analyze three special cases including a standard model with completely connected agents, and characterize the distributions of equilibrium networks of adopters when the social network is an instance of a generalized random graph.

Suggested Citation

  • Arun Sundararajan, 2004. "Local Network Effects and Network Structure," Industrial Organization 0412011, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpio:0412011
    Note: Type of Document - pdf; pages: 38. Model of adoption of a good by strategic nodes in a random graph.
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/io/papers/0412/0412011.pdf
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    More about this item

    Keywords

    network structure; random graph; small world; science of networks; network formation; adoption game;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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