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Course Description

Course: Network and Information Economics

Code: ΕCO465

Semester: B (3 hours)

Tutor: Emmanuel Athanasiou

Aims and Objectives:

This is an advanced undergraduate elective course. Its purpose is to introduce students to strategic behavior of firms providing network goods or operating under conditions involving indirect network effects. 

While the utility of normal goods depends on the quantity consumed, the utility of network goods also depends directly on how many other agents decide to consume the same good. Indirect network effects arise when the simultaneous decision of many agents to purchase a particular good leads to the exploitation of economies of scale on the part of the providers, thus potentially a lower price for all consumers.

Example of network goods include telecommunication services, transport services, retail networks etc. Indirect network effects appear in all cases where fixed costs are a substantial part of total costs.

Strategic behavior in both types of markets will depend on the relevant importance  of certain categories of characteristics, such as

  • the degree of complementarity and standardization of goods offered by different providers.
  • Network externalities in consumption.
  • Substantial tranasistion costs for the consumer in changing provider of a good or service.
  • Substantial economies of scale in production.

All of the above characteristics may be the object of strategic behavior by firms. Thus the decision to make one’s product compatible with complementary products offered by a different provider is a strategic one since it describes the reactions of a firm to decisions made by other firms that will ultimately affect the profits of all firms. Similarly, the degree a firm will reduce customer mobility to alternative providers, will involve creating incentives, both positive and negative, such as long term legal contracts, repeat buyer preferential pricing etc. The cost of providing these incentives has to be weighted against the benefit of increasing market power for the firm.

These and similar issues are covered during the course and are grouped under three main headings. Strategic pricing decisions, decisions to adopt innovation and information goods markets.

Course Books:

1) Oz Shy. “The Economics of Network Industries”

2) N. Economides. “The Economics of Networks”

Notes provided through UOA e-class.