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Essays on the Economics of Networks

  • Author(s): Graupner, Alexander
  • Advisor(s): Board, Simon A
  • et al.

This dissertation contains three chapters on how economic networks affect various market situations. Broadly, they cover contracting and monopoly pricing in the presence of economic networks.

The first chapter considers a principal, many agents contracting problem. Agents sit on a network of complementarities. That is, the effort of one agent affects the value of effort for those with whom he connects. Given this structure on effort, I characterize the first best contract. This contract induces efforts that reflect the agents Bonacich centrality in the symmetrized network. I then consider a variety of bilateral contracts, and compare their values for the principal. First, I consider bilateral forcing contracts. These contracts induce less effort per agent than the first best contract. Agents’ effort distortions depends on their bibliographic coupling. I show that it is this novel measure that drives effort down for certain agents. Networks with high total bibliographic coupling have a large profit gap from first to second best forcing contracts. I compare these contracts to bilateral linear contracts, and show that linear contracts outperform the forcing contracts. Finally, I show that base and bonus contracts are profit maximizing for the principal, and implement first best.

The second chapter considers a monopolist who introduces a new durable good to a base of consumers who are connected on a network of communication. Consumers are initially unaware of the product, and must learn about its existence through their neighbors. Each consumer who purchases informs a group of neighbors, and the information flows through consumers as a branching process. The monopolist commits to a dynamic price path on the infinite horizon. I find that though consumers are fully strategic, the monopolist finds it optimal to serve the entire consumer base infinitely often, which implies a sales structure. I then derive the optimal price path for a simplified model of two agents, and derive comparative statics.

The third chapter considers a monopolist who sells to a consumer base that is largely unaware of the product. The monopolist spreads the information of the product to consumers by the past purchasers. I assume that the monopolist knows the exact network structure on which consumers live, and sets prices based off of consumers positions and the aware set of consumers. I consider three different pricing strategies. First, I consider a setting where the monopolist can price discriminate based on the consumers’ network position. In this case I am able to find which consumers are important to the information flow. Consumers who are aware early get a discount, along with agents who are critical to the information flow. If there are consumers who can only be reached through one consumer purchasing, this consumer is offered a discounted price. I see that these ideas follow through to the single priced monopolist case, where prices fluctuate if many critical agents exist. Finally, I consider the optimal mechanism, where the monopolist can price discriminate based off of network position and price. In this case the monopolist can find the optimal flow of information and implement it.

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