# Economics of networks

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**Economics of networks** is a discipline in the fields of [economics](/source/Economics) and [network sciences](/source/Network_science). It is primarily concerned with the understanding of economic phenomena by using network concepts and the tools of [network science](/source/Network_science). Prominent authors in the field include [Sanjeev Goyal](/source/Sanjeev_Goyal), [Matthew O. Jackson](/source/Matthew_O._Jackson), and [Rachel Kranton](/source/Rachel_Kranton).[1][2][3]

This term should not be confused with [network economics](/source/Network_economics) or [network externality](/source/Network_effect).

## Models of networked markets

The concept of networks enables a better understanding of the functioning of markets. On the border of network science and market theory, several models have emerged to explain different aspects in markets.

### [Exchange theory](/source/Social_exchange_theory)

[Exchange theory](/source/Exchange_theory) explains how economic transactions, trade in favor, communication of information, or other exchanges are affected by the structure of the relationships among the involved participants.[2] The main idea is that the act of exchange is influenced by the agents’ opportunities and their environment. For example, the position of a given agent in the network can endorse them with the power in the auctions and deals they make with their partners.[4]

### Bilateral Trading Models

As part of exchange theory, bilateral trading models consider sellers and buyers. These models use [game-theoretic](/source/Game_theory) models of bargaining in networks to help predict the behavior of agents depending on the type of network.[2] The outcome of transactions can be determined by, for instance, the number of sellers a buyer is connected to, or vice versa (Corominas-Bosch[5] model). Another case occurs when the agents agree on a transaction through an auction and their decision-making during the auction depends on the link structure. Kranton and Minehart[6] concluded that if markets were considered networks, it would enable sellers to pool uncertainty in demand. Building links is costly, however, due to trade-offs not all links are necessary for the network, resulting in a sparse, efficiency-enhancing network.[*[citation needed](https://en.wikipedia.org/wiki/Wikipedia:Citation_needed)*]

### Informal exchange

The study of networks in economics started before the development of network science. [Károly Polány](/source/K%C3%A1roly_Pol%C3%A1nyi), [Claude Lévi-Strauss](/source/Claude_L%C3%A9vi-Strauss), and [Bronislaw Malinowski](/source/Bronis%C5%82aw_Malinowski) studied tribes where complicated [gift exchange](/source/Gift_economy) mechanisms constructed networks between groups, such as families or islands. Although modern trade systems differ fundamentally, such systems based on reciprocity can still survive and reciprocity-based or personalized exchange deals persist even when a market would be more efficient. According to Kranton,[7] informal exchange can exist in networks if transactions are more reciprocal than market-based. In this case, market exchange is hard to find and is associated with high search costs, therefore yielding low utility. Personalized exchange agreements ensure the possibility of long-term agreements.[*[citation needed](https://en.wikipedia.org/wiki/Wikipedia:Citation_needed)*]

## Scale-free property and economics

Recent studies have tried to examine the deeper connection between [socio-economic](/source/Socioeconomic) factors and phenomena and the [scale-free property](/source/Scale-free_network). They found that [business networks](/source/Business_networks) have scale-free property and that the [merger](/source/Mergers_and_acquisitions) among companies decreases the average separation between firms and increases [cliquishness](/source/Clique).[8] In another research paper,[9] scientists found that payment flows in an [online payment](/source/Online_payment) system exhibit free-scale property, high [clustering coefficient](/source/Clustering_coefficient), and [small world phenomenon](/source/Small_world_phenomenon) and that after the [September 11 attacks](/source/September_11_attacks) the connectivity of the network reduced and average path length increased. These results were found to be useful in order to understand how to overcome a possible contagion of similar disturbances in [payment networks.](/source/Payment_network)

## World trade web

[World trade](/source/International_trade) is generally highlighted as a typical example of large networks. The interconnectedness of the countries can have both positive and negative externalities. It has been shown that the world trade web exhibits [scale-free](/source/Scale-free_network) properties, where the main hub is the United States. Eighteen out of the twenty-one developed countries that were analyzed showed synchronization in economic performance and [cycles](/source/Economic_cycle) with the US during 1975-2000.[10] The remaining three countries are exceptions. Austria’s performance correlates highly with that of Germany, while Germany and Japan took differing economic paths after World War II as a result of their unique situations. Despite the embeddedness in the global economy that Germany and Japan experienced, the unusual economic measures following [Germany’s unification](/source/Unification_of_Germany) in 1992 and the [Plaza Accord](/source/Plaza_Accord) in 1985 (which appreciated the Japanese Yen), resulted in a different economic trajectory compared to the majority of developed countries. The importance of regional economic and political cooperation is also highlighted in the analysis.

## See also

- [Critical mass (Sociodynamics)](/source/Critical_mass_(sociodynamics))

- [Critical Mass (Book)](/source/Critical_Mass_(book))

- [Network effect](/source/Network_effect)

## References

1. **[^](#cite_ref-1)** Bramoullé, Yann; Kranton, Rachel (1 July 2007). "Public goods in networks". *[Journal of Economic Theory](/source/Journal_of_Economic_Theory)*. **135** (1): 478–494. [doi](/source/Doi_(identifier)):[10.1016/j.jet.2006.06.006](https://doi.org/10.1016%2Fj.jet.2006.06.006). [hdl](/source/Hdl_(identifier)):[10161/1943](https://hdl.handle.net/10161%2F1943).

1. ^ [***a***](#cite_ref-jackson2008_2-0) [***b***](#cite_ref-jackson2008_2-1) [***c***](#cite_ref-jackson2008_2-2) Jackson, Matthew O. (2008). *Social and economic networks*. Princeton, NJ: Princeton University Press. [ISBN](/source/ISBN_(identifier)) [978-0-691-14820-5](https://en.wikipedia.org/wiki/Special:BookSources/978-0-691-14820-5).

1. **[^](#cite_ref-3)** Goyal, Sanjeev; van der Leij, Marco J.; Moraga-González, José Luis (April 2006). ["Economics: An Emerging Small World"](https://research.rug.nl/en/publications/91180946-f9f6-4619-9842-e1df7633b961). *[Journal of Political Economy](/source/Journal_of_Political_Economy)*. **114** (2): 403–412. [doi](/source/Doi_(identifier)):[10.1086/500990](https://doi.org/10.1086%2F500990). [hdl](/source/Hdl_(identifier)):[1765/6696](https://hdl.handle.net/1765%2F6696). [S2CID](/source/S2CID_(identifier)) [11390706](https://api.semanticscholar.org/CorpusID:11390706).

1. **[^](#cite_ref-4)** Cook, Karen S.; Emerson, Richard M. (October 1978). "Power, Equity and Commitment in Exchange Networks". *[American Sociological Review](/source/American_Sociological_Review)*. **43** (5): 721–739. [doi](/source/Doi_(identifier)):[10.2307/2094546](https://doi.org/10.2307%2F2094546). [JSTOR](/source/JSTOR_(identifier)) [2094546](https://www.jstor.org/stable/2094546).

1. **[^](#cite_ref-5)** Corominas-Bosch, Margarida (2004). "One Two-Sided Network Markets". *[Journal of Economic Theory](/source/Journal_of_Economic_Theory)*. **115**: 35–77. [doi](/source/Doi_(identifier)):[10.1016/s0022-0531(03)00110-8](https://doi.org/10.1016%2Fs0022-0531%2803%2900110-8).

1. **[^](#cite_ref-6)** Kranton, Rachel E.; Minehart, Deborah F. (June 2001). "A Theory of Buyer-Seller Networks". *[American Economic Review](/source/American_Economic_Review)*. **91** (3): 485–508. [CiteSeerX](/source/CiteSeerX_(identifier)) [10.1.1.126.7772](https://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.126.7772). [doi](/source/Doi_(identifier)):[10.1257/aer.91.3.485](https://doi.org/10.1257%2Faer.91.3.485).

1. **[^](#cite_ref-7)** Kranton, Rachel E. (September 1996). "Reciprocal Exchange: A Self-Sustaining System". *American Economic Review*. **86** (4): 830–851. [JSTOR](/source/JSTOR_(identifier)) [2118307](https://www.jstor.org/stable/2118307).

1. **[^](#cite_ref-8)** Souma, Wataru; Fujiwara, Yoshi; Aoyama, Hideaki (2003). "Complex networks and economics". *Physica A*. **324** (1–2): 396–401. [Bibcode](/source/Bibcode_(identifier)):[2003PhyA..324..396S](https://ui.adsabs.harvard.edu/abs/2003PhyA..324..396S). [doi](/source/Doi_(identifier)):[10.1016/s0378-4371(02)01858-7](https://doi.org/10.1016%2Fs0378-4371%2802%2901858-7).

1. **[^](#cite_ref-9)** Soramaki, Kimmo; Bech, Morten L.; Arnold, Jeffrey; Glass, Robert J.; Beyeler, Walter E. (June 2007). "The topology of interbank payment flows". *Physica A*. **379** (1): 317–333. [Bibcode](/source/Bibcode_(identifier)):[2007PhyA..379..317S](https://ui.adsabs.harvard.edu/abs/2007PhyA..379..317S). [doi](/source/Doi_(identifier)):[10.1016/j.physa.2006.11.093](https://doi.org/10.1016%2Fj.physa.2006.11.093). [hdl](/source/Hdl_(identifier)):[10419/60649](https://hdl.handle.net/10419%2F60649).

1. **[^](#cite_ref-10)** Li, Xiang; Jin, Yu Ying; Chen, Guanrong (October 2003). "Complexity and synchronization of the World Trade Web". *Physica A*. **328** (1–2): 287–296. [Bibcode](/source/Bibcode_(identifier)):[2003PhyA..328..287L](https://ui.adsabs.harvard.edu/abs/2003PhyA..328..287L). [doi](/source/Doi_(identifier)):[10.1016/S0378-4371(03)00567-3](https://doi.org/10.1016%2FS0378-4371%2803%2900567-3).

## Literature

- [David Easley](/source/David_Easley) and [Jon Kleinberg](/source/Jon_Kleinberg) (2010). [*Networks, Crowds, and Markets:Reasoning About a Highly Connected World*](https://www.cs.cornell.edu/home/kleinber/networks-book/). Cambridge University Press. [ISBN](/source/ISBN_(identifier)) [9780521195331](https://en.wikipedia.org/wiki/Special:BookSources/9780521195331).

- [Philip Ball](/source/Philip_Ball) (2006-05-16). [*Critical Mass*](https://www.goodreads.com/book/show/472609.Critical_Mass). Macmillan. [ISBN](/source/ISBN_(identifier)) [9780374530419](https://en.wikipedia.org/wiki/Special:BookSources/9780374530419).

## External links

- [Economics of Networks](https://web.archive.org/web/20150430143201/http://econ.duke.edu/people/kranton/networks), Duke University

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Adapted from the Wikipedia article [Economics of networks](https://en.wikipedia.org/wiki/Economics_of_networks) by Wikipedia contributors ([contributor history](https://en.wikipedia.org/wiki/Economics_of_networks?action=history)). Available under [Creative Commons Attribution-ShareAlike 4.0 International](https://creativecommons.org/licenses/by-sa/4.0/). Changes may have been made.