Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Do market prices reflect customers’ social networks?

01.12.2005


Pekka Sääskilahti, MSc (Econ.), will defend his doctoral thesis entitled ”Essays on the Economics of Networks and Social Relations” at the Helsinki School of Economics on December 7, 2005. The public defence will start at 12 o’clock in the Stora Enso Hall of the Chydenia building (address: Runeberginkatu 22-24, Helsinki). The opponent is Professor Robin Mason, PhD, (University of Southampton) and the custos is Professor Pekka Ilmakunnas, PhD, (Helsinki School of Economics).



Modern society is built on networks. Transportation networks take people from one place to another; information networks do the same virtually. Family, friends, colleagues and neighbours form our social relations. Livelihood may depend less on family today than in ancient agrarian times, but leisure time is at least as social as it ever was. Mr. Sääskilahti asks how companies take their customers’ social networks into account in their pricing and investment strategies.

The utility of social goods increases the more people adopt them. This feature is called network externality. The fax machine is a classic example. One fax is useless, but once there are millions of faxes, the utility of a single machine is significant. Modern examples include mobile phones, game consoles, software, and many Internet-based services. As far as network externalities are concerned, the consumer’s buying decision follows the “I buy only if you buy” strategy. Since all consumers think this way, we have multiple equilibria: all buy or no one buys. This indeterminacy regarding equilibrium is a problem because we obtain multiple predictions about the firm’s strategy even under a single market environment.


In the first part of the dissertation, Mr. Sääskilahti shows how the multiplicity of equilibria is not as acute a problem as network economics has conventionally predicted, and that consumers are able to make determinate decisions even under network externalities. Then Mr. Sääskilahti shows that a firm is always worse off when uncertainty among consumers about the utility of a commodity increases . On the other hand, greater uncertainty increases the utility of the consumers if the level of uncertainty is already sufficiently high.

Network externalities are given a functional form in the conventional network model. This approach involves an implicit assumption on the network structure: each member has a relation with everyone else in the network. However, in reality most networks are less connected, and many networks are asymmetric so that some members are better linked than others.

In the second part of the dissertation, Mr. Sääskilahti studies how network structure affects the firm’s pricing strategy. He shows that network topology is a more important factor than network size. The central network agents benefit from their positions at the expense of more peripheral members, because the firm sets the price favouring the central agents. Increasing the size of the network benefits the firm and the central agents, but the peripheral agents are adversely affected. Asymmetry of the network, however, constrains the firm’s profits. The results question the popular Internet-strategy of the 1990s, which considered it imperative to increase the network size as fast as possible. It would have been more important to identify the central agents.

Interaction in many social networks is facilitated by technological innovations. In the third part of the dissertation, Mr. Sääskilahti studies the interface between social networks and technological development. Private research and development (R&D) often leaks to rivals. Mr. Sääskilahti asks how the joint effect of technological leakages and network externalities affects the firms’ pricing and R&D-investment strategies. Counter-intuitively, a decrease in the level of private R&D appropriability leads to an increase in R&D efforts by a firm if the network externalities are strong. However, the industry-wide R&D level decreases as rival companies reduce their own investments.

Eeva Lehtinen | alfa
Further information:
http://helecon3.hkkk.fi/diss/

More articles from Business and Finance:

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Salmonella as a tumour medication

HZI researchers developed a bacterial strain that can be used in cancer therapy

Salmonellae are dangerous pathogens that enter the body via contaminated food and can cause severe infections. But these bacteria are also known to target...

Im Focus: Neutron star merger directly observed for the first time

University of Maryland researchers contribute to historic detection of gravitational waves and light created by event

On August 17, 2017, at 12:41:04 UTC, scientists made the first direct observation of a merger between two neutron stars--the dense, collapsed cores that remain...

Im Focus: Breaking: the first light from two neutron stars merging

Seven new papers describe the first-ever detection of light from a gravitational wave source. The event, caused by two neutron stars colliding and merging together, was dubbed GW170817 because it sent ripples through space-time that reached Earth on 2017 August 17. Around the world, hundreds of excited astronomers mobilized quickly and were able to observe the event using numerous telescopes, providing a wealth of new data.

Previous detections of gravitational waves have all involved the merger of two black holes, a feat that won the 2017 Nobel Prize in Physics earlier this month....

Im Focus: Smart sensors for efficient processes

Material defects in end products can quickly result in failures in many areas of industry, and have a massive impact on the safe use of their products. This is why, in the field of quality assurance, intelligent, nondestructive sensor systems play a key role. They allow testing components and parts in a rapid and cost-efficient manner without destroying the actual product or changing its surface. Experts from the Fraunhofer IZFP in Saarbrücken will be presenting two exhibits at the Blechexpo in Stuttgart from 7–10 November 2017 that allow fast, reliable, and automated characterization of materials and detection of defects (Hall 5, Booth 5306).

When quality testing uses time-consuming destructive test methods, it can result in enormous costs due to damaging or destroying the products. And given that...

Im Focus: Cold molecules on collision course

Using a new cooling technique MPQ scientists succeed at observing collisions in a dense beam of cold and slow dipolar molecules.

How do chemical reactions proceed at extremely low temperatures? The answer requires the investigation of molecular samples that are cold, dense, and slow at...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

3rd Symposium on Driving Simulation

23.10.2017 | Event News

ASEAN Member States discuss the future role of renewable energy

17.10.2017 | Event News

World Health Summit 2017: International experts set the course for the future of Global Health

10.10.2017 | Event News

 
Latest News

Microfluidics probe 'cholesterol' of the oil industry

23.10.2017 | Life Sciences

Gamma rays will reach beyond the limits of light

23.10.2017 | Physics and Astronomy

The end of pneumonia? New vaccine offers hope

23.10.2017 | Health and Medicine

VideoLinks
B2B-VideoLinks
More VideoLinks >>>