Network markets and the structure of networks

Network markets are characterized by composite goods or services that can b e obtained from alternative combinations of basic products. Examples are co mplex, multistage production and consumption systems, transport and communi cations. Efficiency in these markets depends on the net effect of the compl ementary and substitution relationships that exist between elementary produ cts, which are determined by network topology and market structure. This pa per examines factors that affect equilibria in network markets by consideri ng a number of simple economic models of network markets. First it is shown how network topology influences profits and welfare under different market regimes. In particular, attention is given to price discrimination in mono polistic networks. Next evolution of networks is examined, which may occur via investment in new links by incumbent firms, or via entry of new firms i n the network. It is shown that the number of competitors in equilibrium ma y not coincide with the socially optimal one, which in turn depends on the network structure. In order to show some concrete implications of the theor etical results two examples are presented, dealing with intermediate factor s in an input-output production system, and with the trade-off between netw ork externalities and economies of scale and density in hub-and-spoke trans portation networks.