Abstract We analyze the problem of optimal monopoly pricing in social networks in order to characterize the influence of the network topology on the pricing rule. It is shown that this influence depends on the type of providers (local versus global monopoly) and of externalities (consumption versus price). We identify two situations where the monopolist does not discriminate across nodes in the network (global monopoly with consumption externalities and local monopoly with price externalities) and characterize the relevant centrality index used to discriminate among nodes in the other situations. We also analyze the robustness of the analysis with respect to changes in demand, and the introduction of bargaining between the monopolist and the consumer. JEL Classification Numbers: D85, D43, C69 Keywords: Social Networks, Monopoly Pricing, Network Externalities, Reference Price, Centrality Measures * We dedicate this paper to the memory of Toni Calvó-Armengol, a gifted network theorist and a wonderful friend. We thank Coralio Ballester,

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Abstract Modern …nancial systems exhibit a high degree of interdependence. There are different possible sources of connections between …nancial institutions, stemming from both the asset and the liability side of their balance sheet. For instance, banks are directly connected through mutual exposures acquired on the interbank market. Likewise, holding similar portfolios or sharing the same mass of depositors creates indirect linkages between …nancial institutions. Broadly understood as a collection of nodes and links between nodes, networks can be a useful representation of …nancial systems. By providing means to model the speci…cs of economic interactions, network analysis can better explain certain economic phenomena. In this paper we argue that the use of network theories can enrich our understanding of …nancial systems. We review the recent developments in …nancial networks, highlighting the synergies created from applying network theory to answer …nancial questions. Further, we propose several directions of research. First, we consider the issue of systemic risk. In this context, two questions arise: how resilient …nancial networks are to contagion, and how …nan-cial institutions form connections when exposed to the risk of contagion. The second issue we consider is how network theory can be used to explain freezes in the interbank market of the type we have observed in August 2007 and subsequently. The third issue is how social networks can improve investment decisions and corporate governance. Recent empirical work has provided some interesting results in this regard. The fourth issue concerns the role of networks in distributing primary issues of securities as, for example, in initial public o¤erings, or seasoned debt and equity issues. Finally, we consider the role of networks as a form of mutual monitoring as in micro…nance.

This paper provides a theory of dynamic intermediation in over-the-counter markets. Intermediation arises so agents that meet infrequently can trade risky assets without collateral. When meeting the same counterparty again is unlikely, an agent develops a long-term relationship with another trader who then acts as an intermediary. In a relationship, two traders condition the terms of trade on information about past transactions. A trade-off exists between forming many relationships and trading through intermediaries. First, maintaining relationships is costly. Second, agents intermediating transactions between others require a fee. I show that in equilibrium one agent intermediates all the trade in the market.

We study the stability of social and economic networks when players are farsighted. In particular, we examine whether the networks formed by farsighted players are different from those formed by myopic players. We adopt Herings, Mauleon and Vannetelbosch’s (Games and Economic Behavior, forthcoming) notion of pairwise farsightedly stable set. We first investigate in some classical models of social and economic networks whether the pairwise farsightedly stable sets of networks coincide with the set of pairwise (myopically) stable networks and the set of strongly efficient networks. We then provide some primitive conditions on value functions and allocation rules so that the set of strongly efficient networks is the unique pairwise farsightedly stable set. Under the componentwise egalitarian allocation rule, the set of strongly efficient networks and the set of pairwise (myopically) stable networks that are immune to coalitional deviations are the unique pairwise farsightedly stable set if and only if the value function is top convex.

We develop a tractable and applicable dynamic model of network formation with transfers in the presence of externalities. Our primary application is bilateral oligopoly and bargaining in buyer-seller networks. The framework takes as primitives each agent’s static profits, and provides the equilibrium recurrent class of networks and negotiated transfers. Agents anticipate future changes to the network, and links may be costly to form, maintain, or break. We detail the computation and estimation of a Markov-Perfect equilibrium in this environment, and illustrate the approach using simulated data motivated by insurer-hospital negotiations. We explore the impact of hospital mergers on negotiated payments, insurer premiums, and consumer welfare, and demonstrate how accounting for dynamics yields substantively different predictions than traditional static approaches.

Abstract. This paper develops a framework for analyzing individuals' choices in the presence of endogenous social networks and implements it with data on teen smoking decisions and friendship networks. By allowing actions and friendships to be jointly chosen, the framework extends the literature on social interactions, which either models choices, taking the social network as given, or which models friendship selection without incorporating additional choices. In the context of a large population network game, this paper also introduces the notion of k-player Nash stability. This solution concept subsumes the Nash equilibrium and, as k decreases, gradually relaxes the assumptions of rationality and coordination underlying the Nash play. I show how the strategic interactions of the static one-shot play are embedded in an evolutionary model of network formation, which I estimate with social network data from United States high schools. The empirical analysis demonstrates the importance of modeling the joint decisions of friendships and smoking in evaluating existing and proposed new policies targeting teen smoking prevalence. These include policies related to school racial desegregation, separating middle and high school grades, and anti-smoking campaigns. Neglecting the endogeneity of the friendship network leads to a downward bias of 10% to 15% on the predicted effect of these policies on adolescent smoking rates. JEL Codes: D85, C73, L19

This paper explores the role social network capital might play in facilitating poor agents’ escape from poverty traps. We model and simulate endogenous network formation among households heterogeneously endowed with both traditional and social network capital who make investment and technology choices over time in the absence of financial markets and faced with multiple production technologies featuring different fixed costs and returns. We show that social network capital can serve as either a complement to or a substitute for productive assets in facilitating some poor households ’ escape from poverty. However, the voluntary nature of costly social network formation also creates both involuntary and voluntary exclusionary mechanisms that impede some poor households’ exit from poverty. Through numerical simulation, we show that the ameliorative potential of social networks therefore depends fundamentally on broader socioeconomic conditions, including the underlying wealth distribution in the economy, that determine the feasibility of social interactions and the net intertemporal benefits of social network formation. In some settings, targeted public transfers to the poor can crowd-in private resources by

Recent analyses of social networks, both empirical and theoretical, are discussed, with a focus on how social networks influence economic behavior, as well as how social networks form. Some challenges of such research are discussed as are some of the important considerations for the literature going forward.

Pairwise stability (Jackson and Wolinsky, 1996) is the standard stability concept in network formation. It assumes myopic behavior of the agents in the sense that they do not forecast how others might react to their actions. Assuming that agents are farsighted, related stability concepts have been proposed. We design a simple network formation experiment to test these theories. Our results provide support for farsighted stability and strongly reject the idea of myopic behavior.