Local Network Effects and Network Structure

38 Pages Posted: 9 Oct 2008

See all articles by Arun Sundararajan

Arun Sundararajan

New York University (NYU): Stern School of Business and Center for Data Science

Date Written: January 2005

Abstract

This paper presents a model of local network effects in which agents in a social network each value the adoption of a product by a heterogeneous subset of other agents in their "neighborhood", and have incomplete information about the structure and strength of adoption complementarities between all other agents. It shows that the symmetric Bayes-Nash equilibria of a general adoption game are in monotone strategies, can be strictly Pareto-ranked, and the greatest such equilibrium is uniquely coalition-proof. Each Bayes-Nash equilibrium has a corresponding fulfilled-expectations equilibrium under which agents form adoption expectations locally. Examples analyze social networks that are instances of a generalized random graph, and that are complete graphs (a standard model of network effects). The structure of the network of adopting agents is characterized as a function of the equilibrium played, and empirical implications of this characterization are discussed.

Suggested Citation

Sundararajan, Arun, Local Network Effects and Network Structure (January 2005). Information Systems Working Papers Series, Vol. , pp. -, 2005. Available at SSRN: https://ssrn.com/abstract=1281296

Arun Sundararajan (Contact Author)

New York University (NYU): Stern School of Business and Center for Data Science ( email )

44 West 4th Street, KMC 8-90
New York, NY 10012
United States

HOME PAGE: http://digitalarun.ai/

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