Social Network and Network

Effect
Network and rational decision making
● Example of purchasing computer and association of cost
of search and how well informed friends and colleagues
are (the same happens for them)
● individual choices concerning the gathering of information
are shaped by the pattern of connections between persons
in a society.
● Worth while to form connection with well-informed rather
than carrying out the search myself. (compare time and cost
of each approach)=> pattern of society connections=rational
decision making
● Network and graphs (node, link definition and application
on individual, firm, country)
Subjects we will discuss
● Two main questions:
● Economic effects of patterns of society connections?
● Architecture of connections emerged for personal cost and
benefit concerns?
● What we will investigate:
● The effect of network structure on individual behavior
● Network structure means where each node is located and their
mediations
● Two approach we will investigated:
● Game on the network, in terms of strategic integration
● Generation and diffusion of information in the network
● Example of such effects are local social influence
● E.g. effect of smoker friend on one’s smoking
Subject we will discuss
● Two main elements of the investigation:
● Opinion leaders
● Imperfect information
● Degree of correlation between network position and one’s own advantage
● Individuals can exploit their network position to their own advantage
● This advantage depends on investment with different nature
● Three facts:
● Individual trade off the cost and benefit from investment in connections
● Benefit from connection may actually depend on the connections formed by
others
● Individual’s decision on forming connections take place in the context
characterized by externalities
● The effect of their decision on mine: strategic factors on network formation
Subject we will dicuss
● Network as a game:
● Set of players
● Link formation actions available to each player
● Payoff to each player from networks that arises out of
individual linking decisions
● Connection between 1 and 2 may affect pay off to other
players as well
● This player is one who has the power to decide whether a
connection is formed
Some definitions we build part of the
subject on

● A Network is strategically stable (or in equilibrium) if and

only if:
● There would be incentive for individual players either acting
alone or in group to form or delete the links and thereby
alter the network
Questions we are to answer

● What is the architecture of the network that arises in

equilibrium?
● What is the relation between equilibrium and socially
desirable networks?
● What are the implications of strategic networking for the
distribution of individual earning?
Some about social interaction
● Social interaction:
● Exists in many contexts
● Facilitates transmission of valuable information
● Structure of interaction viewed as an instance of informal
institution that supplements formal market in the presence
of the perfect or asymmetric info
● The whole point of the economic that leverages social
interaction (informal) to supplement formal market is:
● Pervasive information imperfection
What we are focusing on
● Networks that no single entity owns them:
● BUT individual entities create their own link with others
● AND this shapes the structure of economic and social
interaction
● So we are supplementing “formal market” concept in
economy that includes price and competition
● With patterns of connection between individual entities in
the form of informal relation
Difference of our study from study of network in
other fields such as methematic
● In other fields scholars are seeking that:
● Significant part of variation in behavior across individuals
arises due to these individuals being member of a different
group
● But in our study (economics of network) we are focusing
on network effects that is:
● Within the same group, individuals have different
connections and this difference in connection will have a
bearing on their behavior
Networks in economics
● Economics: Social and economic phenomenon must ultimately be
explained in terms of the choices made by rational agents
● Study of individuals incentive and rational behavior
● Economic analysis: examination of the effects of adding links on the
incentives of individuals to collect information according to:
● Whether previous information is enough
● Collection costs
● Total information collected has negative effect
● Difference of study of network in economics with different disciplines:
● Key role of individual incentives in in an understanding of individual
behavior as well as in the assessment of alternative policies.
A case
● consider the options available to a government which would like
individuals to make more informed choices with regard to information
technology
● The government sends out information to individuals, who also collect
information privately and share it with their peers
● new links are being formed and social networks are becoming denser,
should the government increase or reduce its advertising?
● A simple-minded view: denser networks→ better-informed individual→
less investment needed from government
● However:
● In the word individuals respond optimally to addition of social connection
● So, new connections may actually lower the overall information available to
the individuals
● As a result: optimal response of the government should be an increase in
investment
Degree distribution and some formalism
● Degree distribution may be related to the node behavior
and well-being
● Economic motivations such as how nodes extract advantage
on account of their connection
● Description of a network in terms of degree distribution
● is useful in studying addition and redistribution of links
Some definitions
● First/second order stochastically dominance of one cumulative
distribution function to another
● Mean preserving spread
● Walk, path, cycle, trail
● Component
● Geodesic distance
● Centrality
● Degree centrality
● Closeness centrality
● Problem of high dependency on shortest path while
● There is reliability problem and actions of individuals have implication
on neighbors and feedback
Some definitions
● Power (G, k) where G is adjacency matrix has the number of
walks from i to j with length k, in its intry g (ij, k)
● Bonacich Centrality: where
moreover
● Clustering:
● Overlap in the neighborhood: in the context of social norms it is
felt that greater overlap in neighborhoods makes it easier to
implement collective punishments
● Individual level: what fraction of my friends are friends of each
other?
● Clustering coefficient:
● For all the network it would be:
Some definitions
● Extending the concept of overlapping network to group of
nodes:
● How self contained or cohesive is a collection of nodes
● Notion of Cliques:
● a maximal subset of nodes with the property that every pair
of nodes has a link.
● complete network:
● there is one clique and this comprises all nodes.
● exclusive groups network:
● each component constitutes a clique
Emperical network
● We will discuss three networks:
● World Wide Web
● Coauthored networks
● Firm Networks
● They :
● contain a number of nodes with high degrees, the “hubs.”
● Spanned by collection of interlinked stars
● In theWorldWideWeb and the coauthor network:
● the hubs only form links with a small fraction of all nodes and so it is
reasonable to view them as central players in “local” star networks.
● In networks with fewer nodes, e.g. network of firms:
● the high degree nodes link with a significant fraction of all nodes (with
majority of hubs in some case)
● Display as core periphery architecture
Emperical networks
WWW Economic
co-authored

Firms research
collaboration
Sexual contacts
Emperical networks
● Three network properties:
● Degree distribution: enormous variation
● average degree is very small compared with the total nodes
● Enormous variation in degree
● 7.5. in 200 million WWW; less than 10 links vs. some with hundreds to thousands
● Sexual contact in Sweden less than 10 vs. over 100 partner (2810 person)
● Clustering: significant
● Star is zero for central, and undefined for peripheral; for complete network is
one
● Economic coauthored (and firm networks) : 0.157 over 7000 times of random
network
● Very low in romantic relations as well as sexual relations
● Average distance between nodes: very small
● 180 million website in WWW, but average distance only 6
● Firm network 4000 nodes, but average distance around 4
● Small work network (common features of social and economic
networks): star networks and core periphery networks
● Small average degree, high clustering, small average distance
Game on the network
● Imitation effect:
● our behavior is influenced significantly by the actions of our
neighbors, friends, and acquaintances;
● the same happens for our friend
● Thus:
● individual behavior is shaped by the entire structure of relationships
that obtain in a social or economic context.
● The same nature of social neighborhood exists in (common
framework of effect of structure of relationship on individual
behavior):
● International relations: trade treaties
● Firms collaboration in research
● Buyer and seller informal long lasting ties
Game
● Building blocks of game with relationships among players:
● formal description of the pattern of relationships among
individual entities
● description of the externalities that an individual’s actions create
for other individuals and how these are mediated by the pattern
of ties between them
● In network:
● Same action carried out by two players with different locations
vis-à-vis player i will have a different effect on player i ’s
payoffs. (e.g. smoke of friends vs. smoke of others)
● Global vs. local concept:
● A player j is said to be a neighbor of player i if players i and j have a
direct tie.
● neighbors local effect vs. non-neighbors global effect in a
specterum
Game-cont
● Other aspects of effects of actions of others:
● Positive vs. negative externality:
● Increase in actions of others raises or lower’s an individuals
payoffs
● Strategic complement vs. strategic substitute:
● how do changes in others’ actions alter an individual’s marginal
returns from increasing her actions
● mixed effects possible depending on the network location
● E.g. action of neighbors positive while non neighbors negative or
vise versa
Questions on study of game on the network
(network effects)
● What are the effects of network location on individual
behavior and wellbeing?
● For instance, do better connected individuals earn larger
payoffs than poorly connected individuals?
● How does individual behavior and well-being respond to
changes—the adding of links or the redistribution of
links—in a network? (change & optimization)
● Are some networks better than others for the attainment of
socially desirable outcomes, and, if so, can we characterize
features of socially desirable networks?
General model of network structure mediating
the effects of actions
● Games on networks consist of (all common knowledge
among players):
● set of players
● the actions each of the players can choose
● a description of the network of relationships between the
players
● a specification of how the actions and the network together
define the payoffs accruing to each player
Considerations in formulation of
strategies of players
● whether players are obliged to choose the same action for all links or
whether they have the freedom to choose link-specific actions.
● Single actions in consumer about product price and features
● Much simpler to model
● Most application work with this one
● Different choices of resources on different research project of firms

● studies of network effects in economics:

● inspired by the idea that individuals are more affected by the
actions of those who are “close by”
● such as neighbors, friends, partners, and colleagues.
General model of network structure
mediating the effects of actions
● Pure local effect:
● Strategy profile of i‘s neighbors:
● Player i faced with profile s in network g has following
payoff: where
● Application:
● social sharing of costly information, coordination game,
prisoner’s dilemma games with local interaction
● Two points:
● The payoff function of two players with the same degree are
identical
● dependency only on the degree and not the identity of the player
● the payoff function is anonymous with regard to choices of
actions (s’ permutation of actions of sk)
General model of network structure
mediating the effects of actions
● Pure global effect:
● Network structure does not matter
● As the action of all players have the same effect on individual’s payoff
● Example:
● Coordination games, or prisoner’s dilemma games, in which an
individual plays with equal probability with all players in the
population
● Combine local and global effect:
● Action of neighbors (anonymous manner):
● Actions of non neighbors:
● The functions would be the same across individual players with
the same degree
● Pay off would be:
● Special case payoff depend simply on sum of neighbor’s action:
General model of network structure
mediating the effects of actions
● Until now model of network effects only used partition
into neighbors and non-neighbors
● However, it can be mediated in richer ways via the
network
● E.g. vary smoothly with distance
● or the effects may depend on the
● number of common neighbors or
● on the number of paths between the players
● Still need more research
● In pure local effect game:
● Positive /Negative externality if own payoff are increasing
/decreasing in actions of neighbors
General model of network structure
mediating the effects of actions
● In pure local effect game
● Exhibit strategic compliment/substitute if
● marginal returns to own action for player i are increasing or decreasing
in the efforts of her neighbors

Pair of own strategies

● In games which exhibit a combination of local and global
effects:
● it is possible that local actions and nonlocal actions have
different and opposite effects
● E.g. collaboration among firms
● the efforts of neighbors create a positive externality (strategic
complement) while the actions of nonneighbors create a negative
externality (Strategic substitute)
Solution concept
● Games on networks are solved by using the concept of Nash
equilibrium
● strategy profile s *=(s1*,s2*,…,sn*) is a Nash equilibrium in
network g if
● For each player i , given the strategies of other players s*-i , s*i
i

maximizes her payoffs

● The analysis of network effect proceeds with:
● 1st derive an equilibrium for a given network
● 2nd examine how equilibrium strategies of players depend on
their location in the network
● This allows us to address:
● Whether certain network locations lead to free riding or exploitation and
● if these behavioral implications correspond to the differences in payoffs
● 3rd examines how altering the network, by adding links or by
redistributing links, alters the equilibrium
Conditions of payoff function under
which Nash Equilibrium exists
● A mixed strategy for a player i is:
● a probability distribution on the action set S and is denoted by
● Profile of mixed strategies

● Existence of Nash Equilibrium under different strategies:

● Suppose the action set of every player S is a compact, nonempty,
and convex subset of R.
● If the payoff function of every player is continuous with respect to
strategies of all players and concave with respect to her own strategy,
● then there exists a Nash equilibrium in pure strategies.
● If the action set of every player is discrete and given by S ={0,x1,x2,
…, xm},
● then there exists a Nash equilibrium, possibly in mixed strategies.
Efficiency and Equity of outcomes
● Definitions:
● Payoff profile:
● dominates when
● A payoff profile is Pareto efficient if no other feasible strategy
dominates it
● It is appropriate when interpersonal comparisons of utility are not
possible
● Aggregate welfare of a strategy profile:
● A strategy profile is said to be efficient if for all strategies s’:
● any profile that maximizes aggregate payoffs is also Pareto efficient

● Other concerns of economics:

● Distribution of income
● The measurement of inequality
Efficiency and Equity of outcomes
● Social connections serve to generate as well as perpetuate
inequality
● If we interpret the payoffs as monetary payments,
● the inequality generated by the network can be assessed
● by using standard notions of inequality such as range and
variance of the payoff profile of a strategy profile
● Notion of inequality in the network:
● Distribution of degrees:
● A vector P:
Dynamics
● So far we were focused one shot interaction
● However, many interactions take place repeatedly over time
● Dynamic of actions:
● Time proceeds in discrete points;
● at every point, an individual gets an opportunity to choose an
action
● In each action:
● takes into account the past history of actions and then chooses an
action which is optimal for herself
● The dynamics of the system will depend crucially on:
● the objective function of the individuals and
● the information they have about the actions of other players and
● what they infer about the future actions of players based on this
information.
Dynamics
● All assuming that individuals are bounded rational based
on assumptions:
● 1st: individuals care only about the immediate payoffs and
do not care about future payoffs
● 2nd:a player believes that the actions of other players in the
current period are the same as the actions in the immediately
preceding period
● Therefore (myopic best-response dynamic process):
● every player maximizes the payoffs in the current period
Dynamic
● Reason for assumptions is descriptive plausibility:
● Action of player on incentive of neighbors, and so on..
● Feed back of action of neighbors of neighbors on player
● Dependence of feedback on length and number of path
● Issue of incomplete information about actions of others
● Resulting in substantive inference problem
● What to infer from changes in actions of player about the
origin
● Role of network specific local private information about
actions of others
Application: Sharing of Costly information
● Information about:
● Quality of product, idea, technologies, prices of goods, and
services
● Effect on
● the demand of products and diffusion of new technologies
● Existence of small set of individuals who are very
well-informed, and their critical role in diffusion
● Explanation? Are they good for social welfare?
● The benefits to each player depend on:
● one’s own efforts and the search efforts of her neighbors
Application: Sharing of Costly information
● For search intensity payoff is
● Where “c” is marginal cost of effort
● It is a game of pure local effect
● Attributes of the payoff:
● Payoffs are an increasing function of others’ action
● Marginal payoffs are a decreasing function of other’s action
● Therefore, this game is:
● Of positive externality
● Strategic substitute
● Action set=compact; payoff=continuous in all actions of all
players; payoff= concave in own action
● Nash equilibrium exists in pure strategy
Application: Sharing of Costly information
● Nash equilibrium:
● If then due to marginal effort lower than marginal
cost
● If then
● The implication:
● in any network g in equilibrium there are potentially two
types of player:
● those who receive aggregate effort from their neighbors in excess
of s^ and exert no effort on their own, and
● those who receive less than s^ aggregate effort from their
neighbors and contribute exactly the difference between what
they receive and s^
Specialized equilibria
● A network in which every player either chooses s^ or 0
● Illustrating network-based experts and free riding
● Questions:
● whether such equilibrium exists?
● How its existence related to the network structure?
● Concept of independent set:
● No two players in I are directly linked
● The maximal independent set is the one that is not contained in any
other
● n exits in complete network and 2 exists in star network
● Exists in any network(using algorithm of separation into I, and I’
● Assigning s^ to independent set, and 0 to others
● In any non empty network there is an equilibrium with free riding
Specialized equlibria
● A first impression of how networks matter:
● when moving from the empty network to any nonempty network this
gives rise to the possibility of significant free riding,
● with a subset of players exerting maximal effort while others exert no
effort at all.
● Definition:
● Distributed equilibrium:
● Strategy profile in which all players choose positive efforts
● Question:
● Does distributed equilibrium exists in every network?
● Answer:
● NO!
● E.g. star network.
● In regular network there always exists equilibrium s*:
Specialized equilibrium
● So, network structure can potentially determine whether distributed
equilibria exist
● level of free riding varies with the structure of the network
● Network structure has a role in:
● Creating experts
● Helping others to free ride on them
● Question:
● Whether players with higher degree earn a higher payoff in equilibrium?
● By taking into account that individual payoff increases in efforts of neighbors
● Answer:
● Not necessarily
● Example of regular network with one s^ (no gain) and all 0, or all s^/n
● Example of star with center of s^, and star with center of 0 (no gain)
Conclusion
● There is no simple relation between degree and equilibrium efforts
● Weaker question:
● Does there exist an equilibrium which exhibits a positive relation
between degree and payoff in every network?
● It’s an open question
● Aggregate welfare:
● Regarding efficiency:
● Any equilibrium in a non empty network is inefficient
● Since f’(0)>0 ,
● the marginal returns for each neighbor are strictly positive and thus strictly
exceed the personal marginal returns
● Question:
● it does raise the question, are some networks better than others from
the point of view of social welfare?
Conclusion-cont
● Answer:
● Adding links to a network appears to be clearly good thing So
long as efforts are unaffected by addition of links
● if a link is added between a player who chooses s^ and another player
who chooses 0, then the equilibrium in the original network
● is also an equilibrium in the supplemented network
● Access to additional information in supplemented network under
assumption f’(.)>0 means strictly higher payoff
● In the regular network when k increases the return remains the same
but the cost declines
● Leading to net payoff increase
● However in some situations the welfare decreases:
● Such as in the case of linking two stars with center s^, leading to one
become centered on s^ and the other with 0, leading to s^ increase in
the peripherals of the second star
Conclusion-cont
● Welfare increase in the first case, and decrease on the second
case (concept of maximal independent set)

● All these shows:

● the role of networks in shaping the distribution of efforts
● The role of networks in sustaining significant free riding and
corresponding payoff inequlity
Conclusion-cont
● Some networks, such as the star, do not permit outcomes in
which all players exert positive effort and therefore imply:
● the existence of experts and free riders.
● Only some particular ways of adding the link will lead to lower
efforts and increase well being
● in some networks, such as the star and the complete network,
multiple equilibria are possible, and that the equilibria exhibit
very different properties.
● An open question:
● Are some equilibria relatively more robust compared with
others?
Social interaciton in crime
● criminal activity exhibits a form of “complementarity”:
● individual incentives to engage in such activities are increasing in
the level of criminal activity of friends and family.
● Possibility:
● Variation in criminal activity arises out of differences in network
location
● consider :
● n-player game with linear quadratic payoffs
● Concavity assumption
● Pij effects of other’s action on player I’s payoff in n*n matrix;
decomposition to three parts:
● Own concavity part
● Uniform global effect
● Local pairwise effect