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Oligopoly Markets and Networks

Periodic Reporting for period 4 - Connections (Oligopoly Markets and Networks)

Reporting period: 2021-08-01 to 2022-05-31

The complex set of relationships amongst economic agents has profound effects on individuals’ behaviour and economic outcomes. Via our connections we learn about new ideas, the quality of products, new investment possibilities and job opportunities. We influence, and are influenced, by our circle of friends. Firms are interconnected in complex processes of production and distribution. A firm’s decisions in a supply chain depend on other firms’ choices in the same supply chain, as well as on firms' behaviour in competing chains. Research on networks, in the last twenty years or so, has set up a common tool to model and study complex relationships within the economic paradigm. An economic view of networks complements existing sociological and statistical theories of networks. Indeed, it allows us to describe how networks emerge from the strategic interaction of individually rational agents, and to evaluate any possible inefficiency that networks generate. My research proposal enlarges this use of models of networks to economic areas where a network perspective seems to be natural and, most importantly, is needed to gain additional insight on economic phenomena.
The project has been developed along two sub-projects.

In sub-project 1, networks are used to model diffusion and adoption of goods. The objectives are to understand how firms incorporate information about consumers' influence in their marketing strategies—pricing strategy, information usage and product design, and what is the effect for consumers’ welfare. This research contributes to the development of a comprehensive analysis of digital markets and to inform policy makers the trade-off of possible regulation. As the result of a sequence of articles, this research has shown that the use of consumers’ information to price products with network effects can be beneficial to consumers and overall welfare. It shows unintended consequences of policies that attempt to increase transparency in the content creation of online influencers. It points out what are the properties of digital business models in which firms have less incentives to invest in protecting users’ information and when businesses collect too much information about their users. It studies the effect of current data protection requirements, and it proposes how to change them to correct for inefficiencies.

In sub-project 2, networks are used to model how inputs are combined and externalities are aggregated to formulate strategic decisions in markets. Possible applications are supply chains, resale markets and financial networks. The objectives are to study firms' strategic behaviour, like pricing and investments in risky projects, in a complex process of production and distribution, and to understand the basic network metrics that are useful to describe market power. By addressing these problems, we encountered the need of developing new methods to better capture the interplay of networks with strategic choices. The first advancement has been to provide a flexible model and methodology through which progress can be made in concrete and practical economic applications. These techniques are now employed to study different applications, including optimal taxation in supply chains and strategic investments of multi-products firms.
By studying oligopoly markets through the lenses of networks this project has advanced the state of the art in the literature of networks and the economic literature of strategic behaviour and market power. The methodological advancement has been reached via new technical contributions that has led to specific metrics of the structure of the network that can be used to understand strategic behaviour. Interestingly, these metrics are related to Principal Component analysis which is a well understood and used methodology in statistic and econometrics. From a more applied perspective, the analysis of this project provides a guidance for policy makers regulating digital systems.
Andrea GaleottI