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We study the incentives of a digital business to collect and protect users’ data. The users’ data the business collects improve the service it provides to consumers, but they may also be accessed, at a cost, by strategic third parties in a way that harms users, imposing endogenous users’ privacy costs. We characterize how the revenue model of the business shapes its optimal data strategy: collection and protection of users’ data. A business with a more data-driven revenue model will collect more users’ data and provide more data protection than a similar business that is more usage driven. Consequently, if users have small direct benefit from data collection, then more usage-driven businesses generate larger consumer surplus than their more data-driven counterparts (the reverse holds if users have large direct benefit from data collection). Relative to the socially desired data strategy, the business may over- or undercollect users’ data and may over- or underprotect it. Restoring efficiency requires a two-pronged regulatory policy, covering both data collection and data protection; one such policy combines a minimal data protection requirement with a tax proportional to the amount of collected data. We finally show that existing regulation in the United States, which focuses only on data protection, may even harm consumer surplus and overall welfare. This paper was accepted by Itai Ashlagi, revenue management and market analytics.

To prevent the spread of an infection, an organization obeys social distancing restrictions and thus limits the number of its members physically present on a given day. We study rotation schemes in which mutually exclusive groups are active on different days. The frequency of rotation affects risk over the duration of diffusion prior to the time the organization is able to react to the infection. If this reaction time is speedy, then such risk is undesirable because prevalence is initially convex in time. In this case, frequent rotation acts as insurance against exposure-time risk and is optimal. Infrequent rotation becomes optimal if the organization reacts slowly. Cross-mixing of the rotating subpopulations is detrimental because it increases contacts between sick and healthy individuals. However, the effect of mixing is small if the terminal prevalence is low in the absence of mixing. This paper was accepted by Joshua Gans, business strategy.

Recent developments in social media have morphed the age-old practice of paying influential individuals for product endorsements into a multibillion-dollar industry, extending well beyond celebrity sponsorships. We develop a parsimonious model in which influencers trade off the increased revenue they obtain from paid endorsements with the negative impact that these have on their followers' engagement and, therefore, on the price influencers receive from marketers. The model provides testable predictions that match suggestive evidence, reveals a novel type of inefficiency that emerges in this market, and clarifies the role of search technology and advice transparency in shaping market activity. In particular, we show that recent policies that make paid endorsements more transparent can backfire, whereas an increase in the effectiveness of the search technology that matches followers to influencers has both direct and strategic positive welfare effects. Our model informs influencers on how to optimally select their mix of products endorsement and organic content. It also shows that managers of platforms hosting influencers may gain from investing in algorithms that screen good influencers and match them to core platform users. This strategy creates competitive pressure amongst influencers to provide better advice, thereby increasing the value of the platform's advertising service. In fact, regulators may also find it beneficial to encourage the implementation of these strategies, because the increase in overall welfare is large, and may not be fully appropriated by platforms.

Highlights • This article assesses the merit of a test through the lenses of economics, with applications to SARS-CoV-2. This allows us to rank distinct tests and to show that this ranking is not universal; it depends on the pre-test information available to the decision-maker and the losses stemming from incorrect actions. We provide a method to select, from multiple tests with different sensitivity and specificity, the test that helps the decision-maker the most to achieve her objective., This article assesses the merit of a test through the lenses of economics, with applications to SARS-CoV-2. This allows us to rank distinct tests and to show that this ranking is not universal; it depends on the pre-test information available to the decision-maker and the losses stemming from incorrect actions. We provide a method to select, from multiple tests with different sensitivity and specificity, the test that helps the decision-maker the most to achieve her objective.

This paper studies the practice of influencer marketing in oligopoly markets and its effect on market efficiency. We develop a duopoly model in which firms sell horizontally differentiated products. Consumers are influenced by other consumers’ choices, and some consumers are more influential than others. Firms’ influencer marketing strategy involves discovering the influence of a subset of consumers and price discriminating based on this information. In equilibrium, firms subsidize consumers whose influence is above average and charge premia to below average influential consumers; the equilibrium premia/discounts depend on the strength of network effects and the level of information that firms have on consumers’ influence. From a normative perspective, we show that influencer marketing leads to inefficient consumer-product matches. Firms’ investments in discovering consumers’ networks are strategic complements, leading to a race for information acquisition that erodes total surplus and firms’ profits but increases consumer surplus.

Prodigious amounts of data are being collected by internet companies about their users' preferences. We consider the information design problem of how to share this information with traditional companies that, in turn, compete on price by offering personalised discounts to customers. We provide a necessary and sufficient condition under which the internet company is able to perfectly segment and monopolise all such markets. Although the information design required to achieve this can be complicated, we also show that a simple and intuitive design often suffices.

Antitrust investigations typically focus on the competitive pressures coming from within the defined markets of interest. However, competitive pressures can also come from other markets. Even when individually these markets place only weak constraints on one another, collectively they may matter. A networks approach to modelling competition permits a systemic view of competition that can sometimes paint a more accurate picture. We demonstrate this through some simple examples, and show more generally how tools from the networks literature can be applied to capture competition across a system of interrelated markets. As a leading example, we consider antitrust investigations into supermarkets where local geographic markets have been used as the basis of investigation.

We endogenize intermediaries' choice to operate as agents or merchants in a market where there are frictions due to asymmetric information about consumption values. A seller has an object for sale and can reach buyers only through intermediaries. Intermediaries can either mediate the transaction by buying and reselling—the merchant mode—or refer buyers to the seller for a fee—the referral mode. When the seller has a strong bargaining position and can condition the asking price to the intermediaries' business model choice, all intermediaries specialize in agency. The seller's and intermediaries' joint profits equal the seller's profits when he has access to all buyers. When the seller does not have such bargaining power, the level of the referral fee and the degree of competition among intermediaries determine the business mode adoption. A hybrid agency–merchant mode may be adopted in equilibrium. Banning the referral mode can decrease welfare because the merchant mode is associated with additional allocative distortions due to asymmetric information.

First published: 11 May 2018 We endogenize intermediaries' choice to operate as agents or merchants in a market where there are frictions due to asymmetric information about consumption values. A seller has an object for sale and can reach buyers only through intermediaries. Intermediaries can either mediate the transaction by buying and reselling the merchant mode or refer buyers to the seller for a fee the referral mode. When the seller has a strong bargaining position and can condition the asking price to the intermediaries' business model choice, all intermediaries specialize in agency. The seller's and intermediaries' joint profits equal the seller's profits when he has access to all buyers. When the seller does not have such bargaining power, the level of the referral fee and the degree of competition among intermediaries determine the business mode adoption. A hybrid agency-merchant mode may be adopted in equilibrium. Banning the referral mode can decrease welfare because the merchant mode is associated with additional allocative distortions due to asymmetric information.

Recent developments in social media have morphed the age-old practice of paying influential individuals for product endorsements into a multibillion-dollar industry, extending well beyond celebrity sponsorships. We develop a parsimonious model in which influencers trade off the increased revenue they obtain from paid endorsements with the negative impact that these have on their followers’ engagement and, therefore, on the price influencers receive from marketers. The model provides testable predictions that match suggestive evidence on pricing of paid endorsements, reveals a novel type of inefficiency that emerges in this market, and clarifies the role of search technology and advice transparency in shaping market activity. In particular, we show that recent policies that make paid endorsements more transparent can backfire, whereas an increase in the effectiveness of the search technology that matches followers to influencers has both direct and strategic positive welfare effects.

The increase in the information that firms can collect or purchase about network effects across consumers motivates two important questions: how does a firm's pricing strategy react to detailed information on network effects? Are the availability and use of such information beneficial or detrimental to consumer surplus? We develop a model in which a monopoly sells a network good and price discriminates based on information about consumers' influence and consumers' susceptibility to influence. The monopoly optimally offers consumers price discounts for their influence and charges price premia for their susceptibility; the price premia and the price discounts are simple functions of the pattern of network effects. We determine under which conditions, relative to uniform price, consumer surplus increases, and we characterize the value of information on network effects for the monopoly.

We develop a model where workers, anticipating the risk of becoming unemployed, invest in connections in order to access information about available jobs that other workers may have. The investment in connections is high when the job separation rate in the labor market is moderate, whereas it is low for either low or high levels of job separation rate. The equilibrium response of network investment to changes in the labor market conditions generates novel empirical predictions. In particular, the probability that a worker finds a new job via his connections increases in the separation rate when the separation rate is low, whereas it decreases when the separation rate is high. These predictions are supported by the empirical patterns that we document for the U.K. labor market.

Financial linkages smooth the shocks faced by individual components of the system, but they also create a wedge between ownership and decision-making. The classical intuition on the role of pooling risk in raising welfare is valid when ownership is evenly dispersed. However, when the ownership of some agents is concentrated in the hands of a few others, greater integration and diversification can lead to excessive risk taking and volatility and result in lower welfare. We also show that individuals undertake too little (too much) risk relative to the first best if the network is homogeneous (heterogeneous), and study optimal networks.

Intermediation is a prominent feature of economic production and exchange. Two features of intermediation are salient: coordination among traders between the ‘source’ and the ‘destination’ and competition between alternative combinations of intermediaries. We develop a simple model to study these forces and we test the theoretical predictions in experiments. Our theoretical analysis yields a complete characterization of pricing equilibrium in networks. There exist both ecient and inecient equilibria, suggesting a key role of coordination among intermediaries. Strategic interaction leads to either buyer and seller retaining all surplus or intermediaries extracting all surplus. We develop conditions on network structure under which these di↵erent extremal outcomes arise, respectively. Laboratory experiments show that eciency prevails in almost all cases: so traders are successful in coordination. Subjects coordinate on extreme surplus division. Finally, experiments highlight the role of network structure in determining pricing and the

 We consider the spread of a harmful state through a population divided into two groups. Interaction patterns capture the full spectrum of assortativity possibilities. We show that a central planner who aims for eradication optimally either divides equally the resources across groups, or concentrates entirely on one group, depending on whether there is positive or negative assortativity, respectively. We study a game in which agents can, at a cost, immunize. Negative assortative interactions generate highly asymmetric equilibrium outcomes between ex-ante identical groups. When groups have an underlying difference, even a small amount of inter-group contacts generates large asymmetries.We study the diffusion of a harmful state through a population. Immunity is available, but is costly. The state is meant to capture various kinds of choices or risky behaviors such as, for example, tobacco use, in which case immunity is interpreted as a commitment to avoid the temptation of smoking. The state can also capture the presence of an electronic virus on a computer network; in this case immunity represents the purchase of anti-virus software, or other costly measures taken to avoid the virus. But perhaps the most conventional interpretation is that the state represents human infection of various communicable diseases that spread through social contacts; in this case immunity captures a decision to vaccinate oneself.

We examine the allocation of scarce attention in team production. Each team member is in charge of a specialized task, which must be adapted to a privately observed shock and coordinated with other tasks. Coordination requires that agents pay attention to each other, but attention is in limited supply. We show that when attention is scarce, organizational focus and leadership naturally arise as a response to organizational trade-offs between coordination and adaptation. At the optimum, all attention is evenly allocated to a select number of "leaders." The organization then excels in a small number of focal tasks at the expense of all others. Our results shed light on the importance of leadership, strategy and “core competences,” as well as new trends in organization design. We also derive implications for the optimal size or “scope” of organizations. Surprisingly, improvements in communication technology may result in smaller but more adaptive organizations.

This chapter surveys a set of papers that analyze strategic intermediation in networks. In all these papers, the architecture of the network has an impact on how surplus is shared across trading parties by determining the level of competition and outside options of traders,. The chapter emphasizes the insights that are most recurrent in the literature .

This handbook represents the frontier of research into the economics of networks: how and why they form, how they influence behavior, how they help govern outcomes in an interactive world, and how they shape collective decision making, opinion formation, and diffusion dynamics. From a methodological perspective, the handbook devotes attention to theory, field experiments, laboratory experiments, and econometrics. Theoretical work in network formation, games played on networks, repeated games, and the interaction between linking and behavior are synthesized. A number of chapters are devoted to studying social process mediated by networks. Topics here include opinion formation, diffusion of information, and disease, and learning. There are also chapters devoted to financial contagion and systemic risk. Next, the handbook includes a section that discusses communities more generally, with applications including social trust, favor exchange, and social collateral; the importance of communities for migration patterns; and the role that networks and communities play in the labor market. A prominent role of networks, from an economic perspective, is that they mediate trade. Several chapters cover bilateral trade in networks, strategic intermediation, and the role of networks in international trade. The authors also discuss the role of networks for organizations. One chapter discusses the role of networks for the performance of organizations, while two other chapters discuss managing networks of consumers and pricing in the presence of network-based spillovers. Finally, the chapter discusses the internet as a network with attention to the issue of net neutrality.

In this paper, we illustrate a new approach to the study of how local externalities shape agents’ strategic behavior when the underlying network is volatile and complex. We consider a large population who interacts as specified by a random network with a given degree distribution. Motivated by the complexity of the induced network, we assume that the only precise information agents have is local, i.e. it is restricted to their immediate neighborhood. Each agent chooses an investment level, which in turn imposes a payoff externality on her neighbors that is captured by a (local) Cobb-Douglas production/payoff function. We find that, in the unique interior equilibrium, the induced externality is positive or negative, depending on whether investment costs are (respectively) above or below a certain threshold. This also has implications on the nature of the equilibrium strategy, which is increasing in the degree, in the first case, and decreasing in the second. Finally, we also characterize how the equilibrium changes when the network topology varies and becomes more connected, or when its degree distribution becomes more polarized.

This paper studies a consumers’ search model with word of mouth communication. Firms market a homogeneous product and choose prices. Consumers obtain price information in two ways. They can search on their own, and they can talk to other consumers. In the basic model word of mouth communication is exogenous and the focus is on how the level of word of mouth communication shapes market equilibrium outcomes. When search costs are low an intensification in word of mouth communication decreases firms’ competition; the opposite holds when search costs are high. The model is then extended to allow for strategic word of mouth communication. Market equilibria with word of mouth communication have the feature that some consumers acquire information personally, while other consumers obtain their information by networking with others. A decrease in the costs of word of mouth communication relatively to the costs of searching reduces the fraction of consumers who acquire information personally. Consequently, it decreases firms’ competition.

The law of the few refers to the following empirical phenomenon: in social groups a very small subset of individuals invests in collecting information while the rest of the group invests in forming connections with this select few. In many instances, there are no observable dierences in characteristics between those who invest in information and those who invest in forming connections. This paper shows that the law of few naturally emerges in environments with identical rational agents. We develop a strategic game in which players have the opportunity to invest in collecting information as well as in investing in bilateral connections with others. We find that every strict equilibrium of this game exhibits the ‘law of the few’. We also show that this pattern of social dierentiations is ecient in some cases.

The growth of the Internet and assorted technologies has made it possible to collect and process detailed information on social networks. This article investigates how firms (and governments) can harness the power of social networks to promote their goals. We show that the optimal use of social networks leads to higher sales and greater profits. However, an increase in the level and dispersion of social interaction can increase or decrease the optimal influence strategy and profits of the player, depending on the content of the interaction. Optimal influence strategies will target individuals with low or high connections, depending on the content of interaction. Finally, the returns to investing in market research on social networks are greater in more unequal networks.

In contexts ranging from public goods provision to information collection, a player's well-being depends on his or her own action as well as on the actions taken by his or her neighbours. We provide a framework to analyse such strategic interactions when neighbourhood structure, modelled in terms of an underlying network of connections, affects payoffs. In our framework, individuals are partially informed about the structure of the social network. The introduction of incomplete information allows us to provide general results characterizing how the network structure, an individual's position within the network, the nature of games (strategic substitutes vs. complements and positive vs. negative externalities) and the level of information shape individual behaviour and payoffs. Copyright , Wiley-Blackwell.

This discussion paper resulted in a publication in the European Economic Review.We study a two-sided market where a platform attracts firms selling differentiated products and buyers interested in those products. In the unique subgame perfect equilibrium of the game, the platform fully internalizes the network externalities present in the market and firms and consumers all participate in the platform with probability one. The monopolist intermediary extracts all the economic rents generated in the market, except when firms and consumers can trade outside the platform, in which case consumers retain part of the economic rents. The market allocation is constraint efficient in the sense that the monopoly platform does not introduce distortions over and above those arising from the market power of the differentiated product sellers. An increase in the number of retailers increases the amount of variety in the platform but at the same time increases competition. As a result, the platform lowers the firm fees and raises the consumer charges. In contrast, an increase in the extent of product differentiation raises the value of the platform for the consumers but weakens competition. In this case, the platform raises both the charge to the consumers and the fee for the firms.

This paper explores the implications of market segmentation on firm competitiveness. In contrast to earlier work, here market segmentation is minimal in the sense that it is based on consumer attributes that are completely unrelated to tastes. We show that when the market is comprised by two consumer segments and when there is sufficient variation in the per-consumer costs firms need to incur to access the different consumer populations, then firms obtain positive profits in symmetric equilibrium. Otherwise, the equilibrium is characterized by zero profits. As a result, a minimal form of market segmentation combined with advertising cost asymmetries across consumer segments give firms an opportunity to generate positive rents in an otherwise Bertrand-like environment. (C) 2007 Elsevier B.V. All rights reserved.

I study a one-way flow connections model in which players are heterogeneous with respect to values and the costs of establishing a link. I show that values and costs heterogeneity are equally important in determining the level of connectedness and the architecture of equilibrium networks. I also show that when asymmetries are independent of the potential partner there are distributions of costs and values for which centrality is a distincitive feature of equilibrium networks. This sharply contrasts with the homogeneous case.

The business model of companies such as Facebook, MySpace, and Twitter, relies on mon- etizing the information on the interactions and in uences of their users. How valuable is such information, and is its use bene cial or detrimental for consumer welfare? We study these questions in a model where a monopoly sells a network good and may price discriminate using network information: information on consumers in uences and/or on consumers susceptibili- ties to influence. Our framework incorporates a rich set of market products, including goods characterized by global and local network effects. We derive results on the value of network information and determine under which conditions, relative to uniform price, consumer surplus increases. We demonstrate the applicability of our framework using survey data on various types of relationships.

What makes you popular at school? And what are the labor market returns to popularity? We investigate these questions using an objective measure of popularity derived from sociometric theory: the number of friendship nominations received from schoolmates, interpreted as a measure of early accumulation of personal social capital. We develop an econometric model of friendship formation and labor market outcomes allowing for partial observation of networks, and provide new evidence on the impact of early family environment on popularity. We estimate that moving from the 20th to 80th percentile of the high-school popularity distribution yields a 10% wage premium nearly 40 years later.

The aim of the special issue is to explore open problems at the frontier of the Economics of Social Networks. The papers in this special issue range across pure and applied theory and empirical investigations, and in this they reflect the richness of on-going research in the economics of networks. © 2012 De Gruyter.

A firm wishes to inform a community of individuals about its product. Information travels within the community because of the social interactions between individuals. We establish that social interactions appear in a firm's payoff as a network multiplier, which is increasing both in the mean and in the variance of the distribution of connections. We then show that the degree distribution of a neighbor first order dominates the degree distribution of a node; so a firm must pick the neighbor of a node rather than a node itself as the target of communication. The advantages of employing an indirect communication strategy are greater in more dispersed networks. © 2012 De Gruyter.

This paper studies the effect of social learning on political outcomes in a model of informative campaign advertising. We find that communication networks among voters have important effects on parties' incentives to disclose political information, on voters' learning about candidates running for office, and on the polarization of the electoral outcome. In particular, in richer communication networks parties disclose less political information and voters are more likely to possess erroneous beliefs about the characteristics of the candidates running for office. In turn, a richer communication network among voters may lead to political polarization. These results are reinforced when interpersonal communication occurs more frequently among ideologically homogeneous individuals and parties can target political advertising.

We study a two-sided market where a platform attracts firms selling differentiated products and buyers interested in those products. In the unique subgame perfect equilibrium of the game, the platform fully internalizes the network externalities present in the market and firms and consumers all participate in the platform with probability one. The monopolist intermediary extracts all the economic rents generated in the market, except when firms and consumers can trade outside the platform, in which case consumers retain part of the economic rents. The market allocation is constraint efficient in the sense that the monopoly platform does not introduce distortions over and above those arising from the market power of the differentiated product sellers. An increase in the number of retailers increases the amount of variety in the platform but at the same time increases competition. As a result, the platform lowers the firm fees and raises the consumer charges. In contrast, an increase in the extent of product differentiation raises the value of the platform for the consumers but weakens competition. In this case, the platform raises both the charge to the consumers and the fee for the firms.

The important role of friends, neighbors and colleagues in shaping individual choices has been brought out in a number of studies over the years. The presence of significant ‘local’ influence in shaping individual behavior suggests that firms, governments and developmental agencies should explicitly incorporate it in the design of their marketing and developmental strategies. This paper develops a framework for the study of optimal strategies in the presence of social interaction. We focus on the case of a single player who exerts costly effort to get a set of individuals – engaged in social interaction – to choose a certain action. Our formulation allows for different types of social interaction (ranging from sharing of information to direct adoption externalities) and also allows for the player to have incomplete information concerning the connections among individuals. The analysis starts by showing that incorporating information on social interaction can have large effects on the profits of a player. We then show that an increase in the level and dispersion of social interaction can raise or lower the optimal strategy and profits of the player, depending on the content of the interaction. We then study the value of social network information for the player and find that it depends on the dispersion in social connections. The economic interest of these results is illustrated via a discussion of two economic applications: advertising in the presence of word of mouth communication and seeding a network.

We analyze the impact of adolescents' friendship relations in their final-year class of highschool on subsequent labor market success. Based on a typology of network positions we locateeach student within the social system of the school class as either: an isolate, a sycophant,a broker or a receiver. These positions identify individuals' social standing within the groupof classmates and proxy for their interpersonal behavior and social competencies. We offerempirical evidence that differential social standing in adolescence predicts large and persistent earnings disparities over the entire life course. The estimated wage premia and penaltiesdo not appear to be substantially confounded by measures of family and school resources,and materialize largely independent of differences in cognitive abilities, grade rank in class orfriends' characteristics. A moderate share of the earnings inequalities is mediated by differential post-secondary human and social capital investment. From a conceptual point of view, wecontribute an application of egocentered network methods within conventional labor economicsurvey research.

A fundamental question in social sciences is how trust emerges. We provide an answer which relies on the formation of social and economic relationships. We argue that behind trust lies the fact that individuals invest in connections taking into account the potential externalities networks produce. Once social ties are in place, these externalities shape the individuals' incentives to behave efficiently in their interactions and thereby efficient social norms are sustained. We also show that the individual's incentives depend on the architecture of the network as well as on the position of the individual within the network. In particular, when an efficient interaction requires players to mutually cooperate, efficient social norms are easily sustained in symmetric networks. By contrast, when an efficient interaction requires players to play asymmetrically (one cooperates and the other free-rides), efficient social norms are best sustained in fully centralized architectures. We interpret these results indicating that a structural analysis is important to understand how individuals' incentives are shaped in many strategic contexts.

I examine a search model a la' Burdett and Judd (1983). Consumers are embedded in a consumers network, they may costly search for price quotations and the information gathered are non-excludable along direct links. This allows me to explore the effect of endogenous consumers externalities on market functioning. I first show that when search costs are low consumers randomize between searching for one price and two price quotations (high intensity search equilibrium). Otherwise, consumers randomize between searching for one price and not searching at all (low intensity search equilibrium). Second, in both equilibria consumers search less frequently in denser networks. Finally, when search costs are low the expected price and the social welfare increase as the consumers network becomes denser. These results are reverse when search costs are high.