Communication Network Formation with Link Specificity and Value Transferability

Abstract

We propose a model on strategic formation of communication networks with (i) link specificity: the more direct links somebody maintains, the less she can specify her attention per link, the lower her links' value, while this negative externality was previously ignored in the communication context, and (ii) value transferability via indirect links for informational but not for social value from communication, while this positive externality was modeled uniformly before. Assuming only social value to isolate the impact of link specificity, the pairwise stable set includes many nonstandard networks under high or particular combinations of fully connected components under low link specificity. Allowing for social and informational value, the joint effect of link specificity and value transferability reduces the stable set to certain fragmented networks under high or the complete network under low link specificity. These extremes are beneficial for efficiency, whereas quite inefficient networks may arise for intermediate link specificity.JEL classification: A14, C79, D85, M31

Heuristic decision making in network linking

“…Therefore, theoretical OR models of network creation (e.g., Fabrikant et al, 2003;Baron et al, 2006;Monsuur, 2007;Demaine et al, 2012;Janssen & Monsuur, 2012;Harmsen -van Hout et al, 2013;Hellmann & Staudigl, 2014;Olaizola & Valenciano, 2014) should take such effects into consideration. In particular, the current experiment was based on payoff functions used in Harmsen -van Hout et al to model communication network formation with high link specificity.…”

“…Each participant was confronted with a payoff function matching her treatment. This function reflects the benefits and costs of link formation according to a typical situation in communication networks with high cost of link specificity as modelled by Harmsen -van Hout et al (2013). The more direct connections an individual has to maintain with other individuals, the less she is able to specify her attention per link.…”

“…For treatments transfer and both there was value transferability, so value was derived from direct as well as indirectly connected individuals. This reflects a situation where informational value is derived from communication (Harmsen -van Hout et al, 2013). The payoff function was then given by:…”

“…They depend on all individuals in the entire pattern of network links, differently by their exact positions (e.g., Sundararajan, 2007). Furthermore, this network complexity varies depending on whether the type of value that is exchanged through the network only affects direct neighbors or is rather transferable via indirect links (Harmsen -van Hout et al, 2013) and depending on whether decision makers care about the effects of their choices on other individuals (Fehr & Schmidt, 2003).…”

Heuristic Decision Making in Network Linking

“…This function reflected the benefits and costs of link formation according to a typical situation in communication networks with high cost of link specificity as modelled by Harmsen -van Hout et al (2013). The more direct connections an individual has to maintain with other individuals, the less she is able to specify her attention per link.…”