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7 - Networks and Markets
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- By Sanjeev Goyal, University of Cambridge
- Edited by Bo Honoré, Princeton University, New Jersey, Ariel Pakes, Harvard University, Massachusetts, Monika Piazzesi, Stanford University, California, Larry Samuelson, Yale University, Connecticut
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- Book:
- Advances in Economics and Econometrics
- Published online:
- 27 October 2017
- Print publication:
- 02 November 2017, pp 215-267
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- Chapter
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Summary
Networks influence human behavior and well-being, and, realizing this, individuals make conscious efforts to shape their own networks. Over the past decade, economists have combined these ideas with concepts from game theory, oligopoly, general equilibrium, and information economics to develop a general framework of analysis. The ensuing research has deepened our understanding of classical questions in economics and opened up entirely new lines of enquiry.
INTRODUCTION
Our life takes place at the intersection of the global and the local: we function in a world dominated by large firms and international markets, but we also inhabit small and overlapping neighborhoods of friends and family, colleagues and collaborators. Game theory is well suited for the study of behavior in small exclusive groups while general equilibrium theory provides a sophisticated approach to the understanding of large anonymous systems. Networks offer us a framework that combines local interactions within large interconnected populations. In doing so, they fill an important gap in the toolkit of economists.
The key methodological innovation of the early research on networks in the 1990s was the introduction of graph theory alongside purposeful agents. Two ideas were central: the study of how the network architecture shapes human behavior and the study of how purposeful individuals form links and thereby create networks. Over the past decade, economists have developed models that include networks, alongside the familiar notions of strategy, information, prices and competition. These models are now being applied to address an increasingly ambitious range of questions in economics. I see here a close analogy with the spread of game theory in economics, during the 1980s and 1990s, in one applied field after another.
I begin by developing notation and basic concepts on networks in Section 2. Section 3 outlines a framework that combines individual choice, networks and markets, while Section 4 introduces the elements of an economic theory of network formation.
The rest of the paper is devoted to a discussion of economic applications. There has been very rapid growth in research in this field over the last decade. In my presentation, I will favor lines of work that explicitly combine network ideas with familiar models of markets.
4 - Learning in Networks
- Edited by Gabrielle Demange, DELTA, Paris, Myrna Wooders, University of Warwick
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- Book:
- Group Formation in Economics
- Published online:
- 02 February 2010
- Print publication:
- 10 January 2005, pp 122-168
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Summary
Introduction
In a wide range of economic situations, individuals make decisions without being fully informed about the rewards from different options. In many of these instances the decision problems are recurrent, and it is natural that individuals use their past experience and the experience of others in making current decisions. The experience of others is important for two reasons:
It may yield information on different actions per se (as in the case of the choice of new consumer products, agricultural practices, or medicines prescribed).
In many settings the rewards from an action depend on the choices made by others, and so there is a direct value to knowing about other's actions (as in the case of which credit card to use, which language to learn, or whether to buy a fax machine).
This suggests that the precise way in which individuals interact can influence the generation and dissemination of useful information and that this could shape individual choices and social outcomes. In recent years, these considerations have motivated a substantial body of work on learning in economics, which takes explicit account of the structure of interaction among individual entities. The present chapter provides a survey of this research.
I will consider the following simple framework: there is a set of individuals located on nodes of a network, and the arcs of the network reflect relations between these individuals.