Local Network Effects and Network Structure
Arun Sundararajan
Last revised: November 2004
Abstract:
This paper presents a model of local network effects in which agents connected in a social network each value adoption by a heterogeneous subset of others, and have incomplete information about the structure and strength of adoption complementarities between all other agents. I show that the symmetric BayesNash equilibria of a general adoption game are in monotone strategies, can be strictly Paretoranked, and that the greatest equilibrium is uniquely coalitionproof. Each BayesNash equilibrium has a corresponding fulfilledexpectations equilibrium under which agents form localadoption expectations. Examples analyze three special cases including a standard model with completely connected agents, and characterize the distributions of equilibrium networks of adopters when the social network is an instance of a generalized random graph.
Download paper (.pdf,, 414K)


