Академический Документы
Профессиональный Документы
Культура Документы
tP0
containing the ltration
generated by the random variables {c(t)}
tP0
. We model the dynamic
evolution of the network via the following steps:
Link creation: With a constant rate k P0 the network is
allowed to expand. Let W : ([N[ R
NN
be a bounded matrix-
valued function, whose components w
ij
(G) dene the intensities
of link formation between vertex i and j. The function W will be
called the attachment mechanism of the process.
Link destruction: Let n P0 denote the constant rate of link
destruction. Let V : ([N[ R
NN
be a bounded matrix-valued
function, whose components v
ij
(G) dene the intensities of link
destruction between vertex i and j. The function V is called
the volatility mechanism of the process.
In some models of network formation the rate of link destruc-
tion n has been interpreted as environmental volatility (Ehrhardt,
Marsili, & Vega-Redondo, 2006; Marsili, Vega-Redondo, & Slanina,
2004). This is also the motivation behind our denition of a volatil-
ity mechanism. In principle the intensities of link creation and
destruction can be asymmetric, i.e. we do not require in the con-
struction that w
ij
(G) = w
ji
(G), or v
ij
(G) = v
ji
(G), respectively. Hence,
in principle the network formation process can be used to model
the formation of directed as well as undirected networks. This sim-
ple model of an evolving network, will be the building block of our
construction of a co-evolutionary model of networks and play in
Section 4.
2.2.1. Inhomogeneous random graphs
Let ([N[ be the set of all undirected graphs. Suppose that the
intensities of link creation and link destruction are given by the
functions
w
ij
(G) = (1 A
ij
(G))j
ij
; and v
ij
(G) = A
ij
(G)d
ij
: (3)
3
Erds and Rnyi (1959, 1960) introduced the slightly different model in which the
number of vertices and edges are given parameters. The Bernoulli graph model is due
to Gilbert (1959).
4
It is clear that if G is undirected, then A(G) is symmetric. For directed graphs this
symmetry may not hold.
5
A classical reference is the famous letter experiment of Milgram (1967). Other
studies include Dodds, Muhamad, and Watts (2003) and Goyal, Van Der Leij, and
Moraga-Gonzlez (2006).
6
See e.g. Watts and Strogatz (1998), Watts (1999) and Newman (2003b, 2004).
7
See McPherson, Smith-Lovin, and Cook (2001) and Golub (2012), among others.
8
Despite its huge importance, the ERG model has technical problems. See
Chatterjee and Diaconis (2011).
9
This will be necessary in order to model the co-evolution of networks and play in
Section 4.
T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596 585
The scalars j
ij
, d
ij
are positive and symmetric, meaning that j
ij
= j
ji
and d
ij
= d
ji
for all i,j [N]. Additionally we assume that k = n = 1.
This essentially says that the processes of link creation and link
destruction run on the same time scale. Then the following general
picture emerges.
Theorem 2.1 Staudigl (2013). Consider the random graph process
c(t)
tR
with attachment and volatility mechanism W and V given
by the functions specied in Eq. (3). Then the graph process is ergodic
with unique invariant measure
P(G) =
Y
N
i=1
Y
j>i
(p
ij
)
A
ij
(G)
(1 p
ij
)
1A
ij
(G)
; (4)
where p
ij
=
j
ij
j
ij
d
ij
is the edge-success probability of vertex i and j.
The random graph measure (4) describes the probability space
of an inhomogeneous random graph. The wonderful work of Bol-
lobs et al. (2007) studies this model in quite some detail.
10
It con-
tains the ErdsRnyi model as a special case by setting j
ij
= j and
d
ij
= d. Moreover, it generalizes certain networks based on clustering
nodes according to some notion of similarity, as explained in the
next subsection.
2.2.2. Multi-type random networks
In general, networks are complex objects and therefore difcult
to analyze. However, it is often the case that vertices in a network
can be classied to belong to certain groups. Indeed, a prevalent
fact in social networks is the phenomenon of homophily, meaning
that vertices of similar characteristics are more likely to be con-
nected with each other. Therefore, Fienberg, Meyer, and Wasser-
man (1985) introduced blockmodels, where nodes are categorized
to belong to certain subgroups. Each subgroup may have its own
law of network formation. Recently, this type of networks has also
been used in economic theory (Golub, 2012), where it has been
called a multi-type random network.
Suppose that the set of vertices can be partitioned into nitely
many types k {1, . . . , m}. The number of nodes of type k is n
k
,
where 0 6 n
k
6 N. The vector ~n = (n
1
; . . . ; n
m
) denes the partition
of the population of nodes into its types. The number n
k
-
{0, 1, . . . , N} can be either deterministically given, or represent
the realization of a random variable. Assume that the intensities
of link formation and link destruction are w
ij
(G) = (1 A
ij
(G))j
rl
,
v
ij
(G) = A
ij
(G)d
rl
, whenever vertex i is a member of group r, and ver-
tex j is a member of group l for 1 6 r, l 6 m. The model then reduces
to a special case of the inhomogeneous random graph. The edge-
success probabilities between members of group r and group l
are given by p
rl
=
j
rl
j
rl
d
rl
. This grouping, of course, reduces the com-
plexity of the random graph model tremendously. Compared to the
inhomogeneous random graph, the multi-type random graph is
completely specied by the partitioning of the vertices, and the
group-specic edge-success probabilities.
2.3. Random graphs versus strategic network formation
Our proposed strategy to model dynamic network formation is
rather parsimonious. The stochastic process is entirely specied by
the attachment and the volatility mechanism. Particularly interest-
ing examples are the inhomogeneous random graph model, con-
taining the multi-type random network. All these models rely on
a special choice of the intensities of link creation and link destruc-
tion. These rates can in principle be tted from data. Thus, the sta-
tistical models are useful to describe how networks form and
evolve from an observers point of view. They are not able to
explain why networks form and evolve, without adding a comple-
mentary theory of network formation. Thus, to complete the study
of network formation, we have to go to the micro level and under-
stand the forces that drive the nodes to connect to each other. Eco-
nomic and game theoretic reasoning provides the natural language
for this task, and Section 3 summarizes this eld to some extend.
Using these game theoretic concepts, Section 4 presents some
models which combine elements from random graph theory and
game theory.
3. Game theoretic models of network evolution
In social and economic network a link is often interpreted as a
form of revealed preference: Two players are connected with each
other, because it is in their self-interest to have the link. With other
words, individuals are connected with each other because a payoff
or utility is derived from these connections. Frequently the linking
decisions of a single individual affects the utilities of other mem-
bers of the society. To understand networked systems in situations
with interdependent preferences, game theory has been devel-
oped. Using game theoretic reasoning, networks are interpreted
as equilibrium outcomes implemented by rational players. This
modeling approach is potentially useful as it allows us to rational-
ize predicted or observed network structure in terms of socioeco-
nomic behavior. A purely statistical approach to network
formation cannot provide us with such a micro-foundation of ob-
served networks. Moreover, the game theoretic approach allows
the researcher to understand the mechanisms underlying the for-
mation of the network. As a simple example, consider a situation
where a statistician observes a networked system with a center-
sponsored star architecture, such as the one depicted in Fig. 1(i).
11
Having collected these data, a game theoretic model can now
(potentially) be used to postulate preferences (i.e. utility func-
tions), rationalizing this observed interaction structure.
12
3.1. Networks and utilities
A utility-based approach to network formation is rather
straightforward. For each player, there is a utility function
u
i
: ([N[ R. An n-tuple of functions u = (u
1
, . . . , u
N
) represents
the preferences of the society over network architectures. Let us
start with some concrete examples.
3.1.1. The connections model
Research in sociology has emphasized the role of centrality in
social networks.
13
Centrality measures are based on an assessment
of the graph distance between two nodes. The following examples
uses a version of this distance measure, called decay centrality, to
construct a model of strategic network formation. Consider a given
graph G = (V, E). Let d
ij
(G) denote the geodesic distance between ver-
tex i and j, i.e. the length of the shortest path connecting i and j. If
node i cannot be connected to j, then set d
ij
(G) = . A measure of
closeness should then be decreasing in distances. Thus, let d (0, 1)
be a given parameter. The decay centrality between vertex i and j
is then dened as CL
ij
(G) := d
d
ij
(G)
. It has a natural interpretation in
terms of a probabilistic communication model. Let d (0, 1) be the
10
See also Sderberg (2002) and Park and Newman (2004) for earlier treatments of
this model.
11
In this gure, the star is presented as an undirected network. When considering
directed networks, there are several stars: we will call a star network a center-
sponsored star if all links are directed from the center to the periphery players.
Likewise, in a periphery sponsored star, links are directed from the peripheral players
to the center.
12
See Echenique, Lee, Shum, and Yenmez (2013) for a very recent paper in this
direction.
13
See, e.g. Freeman (1979) or Bonacich (1987) for an intriguing discussion of
centrality measures.
586 T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596
probability that communication between adjacent nodes is success-
ful. Then, if the signal transfer is independent, the probability that
the signal reaches vertex j from vertex i with d
ij
(G) = k is on the order
of d
k
. Jackson and Wolinsky (1996) introduce a model were a players
utility is increasing in closeness centrality, but there is a cost to be
paid for each maintained link. Specically, let w
ij
be the intrinsic va-
lue of a communication of player i with player j, and c
ij
> 0 be a cost
which player i has to pay when a direct connection with j is main-
tained. The utility function for player i [N] is given by
u
Co
i
(G) =
X
ji
w
ij
d
d
ij
(G)
X
jN
i
(G)
c
ij
(5)
where N
i
(G) := {j N:ij G} is the set of i
/
s neighbors. This is a ver-
sion of the connections model due to Jackson and Wolinsky (1996).
3.1.2. Local complementarities and Bonacich centrality
Bonacich (1987) introduced a parametric family of centrality
measures in order to formulate the intuitive idea that the centrality
of a single node in a network should depend on the centrality of its
direct neighbors. This self-referential denition of centrality leads
to an eigenvector-based measure, which can be derived from basic
utility-maximization ideas, as shown by Ballester, Calv-Armengol,
and Zenou (2006). Let A be the adjacency matrix of a given net-
work. The powers of this matrix give us information of the connec-
tivity structure of the network.
14
Let b > 0 be a given parameter,
chosen in such a way that the following matrix power series exists
15
:
B(b; A) =
P
n=0
A
n
b
n
= [I bA[
1
. The centrality index proposed by
Bonacich (1987) is dened as
b(a; b; A) = B(b; A)a; (6)
where a
= (a
1
, . . . , a
N
) is a given vector of individual characteristics
of the vertices.
16
Ballester et al. (2006) show that this centrality
measure is actually a Nash equilibrium of an interesting class of
non-cooperative games. There are N agents who are involved in a
team production problem. Each player chooses a non-negative quan-
tity x
i
P0, interpreted as efforts invested in the team production.
High efforts are costly, and the level of effort invested by the other
players affects the utility of player i. To capture these effects, we as-
sume that the payoff of player i from an effort prole x = (x
1
, . . . , x
N
)
is given by u
i
(x
1
; . . . ; x
N
) = a
i
x
i
1
2
x
2
i
bx
i
P
N
j=1
A
ij
x
j
. The players
choose their efforts independently, and in a utility maximizing
way. It can be shown that this game has a unique Nash equilibrium
x
given by x
such that
c
1
<
c
0
N1
and g
i
(G) := [N
i
[ denoting the rm is degree. The output of
rm i is denoted by x
i
, and the market is completely described by a
commonly known inverse demand function P(X) = max[0, a X],
where X P0 is the total output of the industry, and a P1 is the
size of the market. The prot function of rm i is then given by
u
i
(x
1
; . . . ; x
N
) = x
i
P(x
i
P
ji
x
j
) w
i
(G)
. For a given network of
R& D collaborations, it can be shown that the quantity choice game
has a unique Nash equilibrium in which each rm produces
x
+
i
(G) = a X
+
w
i
, with X
+
=
Na
N1
1
N1
P
j
w
j
. The resulting equilib-
rium prot of rm i is
u
R&D
i
(G) :=
(a c
0
) Nc
1
g
i
(G) c
1
X
ji
g
j
(G)
N 1
0
B
B
@
1
C
C
A
2
(8)
Fig. 1. Some important network architectures.
14
Indeed, A
~
1 is a N 1 matrix whose entries are just the degree of the individual
nodes. The vector A
2
~
1 counts the number of walks of length 2 starting from the
individual nodes, and so on.
15
The necessary condition for this to be the case is that 0 < b < k
1
(A)
1
, where k
1
(A)
is the eigenvalue of A having largest modulus.
16
The original Bonacich centrality index is dened as c[I bA[
1
A
~
1. Formula (6) is a
true generalization by setting a = cA
~
1.
T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596 587
Again we see that the equilibrium industry performance can be as-
sessed by knowing the collaboration structure of the rms.
3.2. Pairwise stability and renements
One of the most important equilibriumnotations in the strategic
approach to network formation is the concept of pairwise stability.
This concept considers the differential impact an added link has on
the utility of the involved parties. Thus, let us dene player is utility
differential of a set of links l # E(G) deleted from the network G as
mu
i
(G; l) := u
i
(G) u
i
(G l): (9)
where G l denotes the network obtained by deleting the set of
links l # E(G) from network G. Similarly, G l denotes the network
obtained by adding the set of links l # E(G
c
)E(G) to G. In the fol-
lowing denition G
c
denotes the complete undirected network.
Denition 3.1 Jackson and Wolinsky (1996). A network G ([N[
is pairwise stable (PS) if
(i) for all ij E(G):mu
i
(G, ij) P0 and mu
j
(G, ij) P0, and
(ii) for all ij E(G
c
)E(G):mu
i
(G ij,ij) > 0 = mu
j
(G ij, ij) < 0.
Thus, a network is pairwise stable, if (i) no player has an incen-
tive to delete one of her links and (ii) there does not exists a pair of
players who want to form a mutually benecial link. Pairwise sta-
bility can be reformulated in terms of a simple test performed on
the set of all possible links. Dene
ADD(G) := ij E(G
c
) E(G)[mu
i
(G ij; ij)
> 0 & mu
j
(G ij; ij) P0; (10)
the set of links that can be added to G, and similarly
DEL(G) := ij E(G)[k i; j : mu
k
(G; ij) < 0 ; (11)
the set of links that can be deleted from G. Then G is a pairwise sta-
ble network if and only if ADD (G) = DEL (G) = O.
One potential limitation of Pairwise stability is that it only con-
siders single link changes in each updating step. A natural rene-
ment is thus to consider the formation of mutually benecial
links as well as the deletion of more than one link in one period.
Such an extended stability concepts has been used in the literature
as well, running under the name of Pairwise Nash Stability.
17
Let E
i
(G) := {ij E(G)[j [N]} denote the set of player is links in G,
and E
i
(G) := E(G)E
i
(G) denote the set of links in G in which player
i is not involved. A network is pairwise Nash stable (PNS) if
(i) u
i
(G) Pu
i
(G l
i
) "l
i
E
i
(G), and
(ii) mu
i
(G ij, ij) > 0 = mu
j
(G ij, ij) < 0 "ij E(G
c
)E(G).
Thus, a network that is pairwise Nash stable is also robust
against the deletion of a set of links by any player, while pairwise
stability only considers one link at a time.
Beyond these commonly used stability notions, several rene-
ments have been introduced in the literature. Some concepts,
which we do not discuss in this survey, are the following:
v strong and weak stability (Dutta & Mutuswami, 1997),
v bilateral stability (Goyal & Vega-Redondo, 2007),
v pairwise stability with transfers (Bloch & Jackson, 2007),
v strict pairwise stability (Chakrabarti & Gilles, 2007),
v unilateral stability (Buskens & van de Rijt, 2008)
v cognitive stability (Gallo, 2012), and
v (strict) Nash stability (supported by (strict) Nash equilibrium in
a link formation game due to Myerson (1991)).
3.3. Existence of stable networks
The concept of pairwise stability is one of the most important
equilibrium concepts used in modern network theory. In this sec-
tion we address the question of existence of PS-networks using
two different techniques. The rst technique uses the potential
function method (Monderer & Shapley, 1996; Nisan, Roughgarden,
Tardos, & Vazirani, 2007). The second technique emphasizes the
incentive structure directly. We start with the important concept
of an improving path.
Denition 3.2. An improving path from network G to network G
/
is
a sequence of networks (G
1
, . . . , G
K
) such that G
1
= G, G
K
= G
/
, and
for all 1 6 k < K, it holds that either
(i) G
k+1
= G
k
ij and ij DEL (G
k
), or
(ii) G
k+1
= G
k
ij and ij ADD (G
k
).
Hence, in an improving path each graph G
k+1
is obtained by
either deleting a single link, contained in DEL (G
k
), from the prede-
cessor G
k
, or adding a single link, contained in ADD (G
k
), to the pre-
decessor G
k
. The algorithm is running as long as there exists a
player who wants to delete a link, or there exists a pair of players
who want to form a link connecting them. It is clear that if this
algorithm converges, then the limit network must be pairwise sta-
ble. Therefore, the set of improving paths emanating from a PS net-
work is empty. Based on this concept, Jackson and Watts (2001)
dene a cycle C as an improving path (G
1
, . . . , G
K
) such that
G
1
= G
K
. They call a cycle C closed, if for all networks G C there
does not exists an improving path leading out of it. Jackson and
Watts (2001) show that for any prole of utility functions u, there
exists at least one pairwise stable network or a closed cycle of net-
works. The idea to prove existence of a PS network is now to ex-
clude the existence of cycles. A well-known sufcient condition
ruling out cyclic behavior in non-cooperative games is the exis-
tence of a potential function (Monderer & Shapley, 1996). In a sim-
ilar way, Jackson and Watts (2001) rule out the existence of
improving cycles by imposing the existence of a function w which
could be called a potential function as well.
Proposition 3.3 Jackson and Watts (2001). If there exists a function
w : ([N[ R such that ij ADD (G) if and only if w(G ij) > w(G) and
ij DEL (G) if and only if w(G ij) > w(G) for all G ([N[, then there
exist no cycles. If u exhibits no indifference then there exist no cycles
only if such a function exists.
The no-indifference-condition ensures that for two networks
G, G
/
, separated by one link, the two players affected by that link
have a strict preference ordering between the two networks. The
function w acts as an ordinal potential function.
18
Ordinal potentials
must respect the incentive structure of the underlying utility func-
tions, and thus not every game will have an ordinal potential. As
an example, the connections model of Section 3.1.1 has an ordinal
potential only for certain parameter values (see Jackson & Watts,
2001).
As already indicated, the existence of an ordinal potential
function is stronger than necessary to show existence of pairwise
stable networks. Moreover, it is not easy to check whether a utility
17
Pairwise Nash stability was rst discussed in Jackson and Wolinsky (1996). It has
been used (without formal denition) in Goyal and Joshi (2003), Belleamme and
Bloch (2004) and has been dened in, e.g. Gilles (2005), Bloch and Jackson (2006), and
Calv-Armengol and Ilkili (2009).
18
Existence of such a function is implied by the existence of an ordinal network
potential. See also Chakrabarti and Gilles (2007) and Tardos et al. (2007).
588 T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596
function delivers such a function.
19
Externality conditions on
marginal utilities are, however, easy to check. Hellmann (2013) uses
such externality conditions directly to prove an existence result of
PS-networks. Say a prole of utility function exhibits ordinal convex-
ity in own links if
mu
i
(G ij; ij) P0 = mu
i
(G l
i
ij; ij) P0
for all G ([N[; l
i
#E
i
(G
c
) E
i
(G) and for all ij E
i
(G
c
)E
i
(G l
i
).
20
In
words, if in G the link ij is protable for player i, then it remains
protable in the graph G
/
= G l
i
which is obtained from G by adding
a set of links l
i
. Say a utility function exhibits ordinal strategic
complements (Goyal & Joshi, 2006; Hellmann, 2013) if, for all
G ([N[, for all l
i
# E
i
(G
c
)E
i
(G), and for all ij E
i
(G
c
)E
i
(G) one has
mu
i
(G ij; ij) P0 = mu
i
(G l
i
ij; ij) P0:
In an environment in which players utility functions exhibit
ordinal convexity in own links and the ordinal strategic comple-
ments property, Hellmann (2013) reports the following result.
Proposition 3.4 Hellmann (2013). If a prole of utility functions
u = (u
1
, . . . , u
n
) satises ordinal convexity in own links and the ordinal
strategic complements property, then:
(1) There does not exist a closed improving cycle.
(2) There exists a PNS (and hence also a PS) network.
Compared to Proposition 3.3 cyclic behavior is not ruled out
completely by assuming ordinal convexity and the ordinal strate-
gic complements property. Only the existence of closed cycles is
excluded.
Example 3.5. An example, where the conditions of Proposition 3.4
are satised, is given by u
BC
dened in Section 3.1.2, which may also
include linking costs. Applying Proposition 3.4, there exists a PNS
network. Moreover, because all players have the same utility
function, one can easily conclude that if the empty network is not
PNS then the complete network is uniquely PNS and if the complete
network is not PNS then the empty network is uniquely PNS.
Remark 3.6. When imposing negative externalities (i.e. ordinal
concavity and ordinal strategic substitutes), existence of a PS net-
work cannot be guaranteed, but several uniqueness conditions
are satised. Hellmann (2013) shows that no pairwise stable net-
work can contain or can be contained in another pairwise stable
network. Furthermore conditions for existence of a globally unique
stable network are given (for details see Hellmann, 2013).
3.4. Stable networks in the connections model
To derive structural properties of stable networks beyond exis-
tence and uniqueness, more assumptions have to be imposed on
the players utility functions. A particular nice environment is
described by the connections model (Jackson & Wolinsky, 1996).
Let us focus on the special case, known as the symmetric connections
model
u
Co
i
(G) =
X
ji
d
d
ij
(G)
cg
i
(G): (12)
For this utility function Jackson and Wolinsky (1996) partially char-
acterize the set of pairwise stable networks.
21
Proposition 3.7 Jackson and Wolinsky (1996). Suppose the utility
function is given by (12). Any pairwise stable network has at most one
non-singleton component. For c < d d
2
the complete network is
uniquely pairwise stable, for d d
2
< c < d the star is among the stable
networks and for c > d the empty network is among the stable
networks and no stable network can contain a player with only one
link.
The star network, as visualized in Fig. 1(i), is the network where
one player (the center) has links to all other players (the periphery)
and those players do not have any other links. Beside the star net-
work, many more networks can be pairwise stable.
For the general utility function (5), Jackson and Wolinsky
(1996) do not report any stability results. Johnson and Gilles
(2000) study a version of the connections models, allowing for het-
erogeneity in costs, but homogeneity in benets. In their setting
players are ordered by name from 1, . . . , N such that the cost of a
link between i to j is linearly increasing in the number of players
l
ij
:= [{k [N]:i < k 6 j}[. Thus, in Eq. (5) c
ij
is replaced by l
ij
c. For
high costs c similar features of PS networks as in Proposition 3.7
can be observed. If instead costs are low (c < d d
2
), then there al-
ways exist k networks where players form links to all players
j [N] such that l
ij
6 k and no other links are formed. Thus, in these
k networks links remain local implying that clustering is quite
high, similar to the Small-World architectures displayed in
Fig. 1(iii) (Watts, 1999; Watts & Strogatz, 1998).
A different way of introducing cost heterogeneity is the island
model by Jackson and Rogers (2005). There it is assumed that the
player set [N] is partitioned into islands of equal size J such that
cost of linking is small c
ij
= c if i and j are from the same island,
but are high c < C = c
ij
if i and j belong to different islands. More-
over, benets are only obtained for small distances, i.e. w
ij
= 1 if
d
ij
(G) 6 D and w
ij
= 0 else. The interesting case occurs when
c < d d
2
and C < d + (J 1)d
2
. Then, in any PS network the islands
are (internally) completely connected and there is a path between
any two islands. Moreover, stable networks have low diameter
(bounded above by D + 1) and high clustering coefcients. Thus,
this model matches some key statistics empirically observed in
real word networks.
Persitz (2010) allows for heterogeneous benets w
ij
in the con-
nections model. In his model the players are characterized by
either one of two types t
i
{a, b} such that benets depend on
the types: w
ij
= w
1
if t
i
= t
j
= a, w
ij
= w
2
if t
i
= a, t
j
= b, and w
ij
= w
3
if
t
i
= t
j
= b such that w
1
> w
2
> w
3
. Thus all players prefer the connec-
tion to a type-a player over the connection to a type-b player.
While the trivial networks (complete respectively empty) are sta-
ble for very low respectively high costs, stable networks for med-
ium cost levels have the core periphery architecture where all
a players (the core) are completely connected (if (d d
2
)w
1
> c)
and the b players (the periphery) have connections to the core.
Whether b-players connect to each other or how many links to
a players they have, depends on the exact cost structure. Hence,
stable networks in Persitz (2010) have low diameter and high clus-
tering coefcients and therefore share some statistical features of
stable networks in Jackson and Rogers (2005).
In an incomplete information setting similar to McBride (2006)
(see Section 3.5), Gallo (2012) also shows that stable networks
19
For recent efforts to characterize the class of potential games see Sandholm
(2010b) and Candogan, Menache, Ozdaglar, and Parrilo (2011).
20
For the various denitions of convexity of a network utility function the reader is
referred to Goyal and Joshi (2006), Bloch and Jackson (2007), Calv-Armengol and
Ilkili (2009), Hellmann (2013). It is shown in Hellmann (2013) that all these
denitions are equivalent. The weaker ordinal version is dened in Hellmann (2013).
21
Although the issue of efcient networks and the tension between stable and
efcient networks displays a recurrent theme in the literature, it is beyond the scope
of this survey to review the results on efciency. The reader may be referred e.g. to
Jackson (2005); Buechel and Hellmann (2012) and textbooks by Goyal (2007) and
Jackson (2008).
T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596 589
exhibit low diameter (smaller than 5) and high clustering coef-
cient.
22
In fact, Gallo (2012) studies a slightly more general utility
function than eq. (5), called distance-based utility function. This
class of utility functions were rst introduced in Bloch and Jackson
(2007) and also studied in Mhlmeier, Rusinowska, and Tanimura
(2013). Thus, by generalizing the utility function from relatively sim-
ple settings, like the homogeneous connections model, to more
sophisticated models, stability predictions may reect more realistic
characteristics like low diameter and high clustering.
3.5. One-sided network formation
Most of the concepts introduced so far were formulated for
undirected networks. There are many applications where directed
networks seem to be more appropriate. Examples of directed net-
works include citation networks, hyperlinks connecting web-
pages, ow of knowledge, or more general any communication
network. When network formation can be done without mutual
consent, it is natural to speak about one-sided link formation. In a
very inuential paper, Bala and Goyal (2000) introduce a game the-
oretic model of one-sided network formation. They distinguish be-
tween two basic cases:
One-Way ow: Costs and benets are only incurred by the ini-
tiator of a link.
Two-Way ow: Costs are carried by the initiator of a link, while
benets are shared by both parties.
A pure strategy for player i is a list s
i
S
i
= {0, 1}
N{i}
, with the
interpretation that player i wants a link with j if and only if
s
ij
= 1. Since no consent is required to link to a given player, strat-
egies directly translate into a directed network G ([N[ such that
(i, j) E(G) if and only if s
ij
= 1.
23
In the one-way ow model, each player i receives benets from
all players who are accessible to i. Dene the set C
i
(G) := {j [N]
[$j
1
. . . j
k
[N]: j
1
= j, j
k
= i, (j
l
, j
l+1
) E(G) "1 6 l 6 k 1}, and call
l
i
(G) := [C
i
(G)[. In the one-way ow model of Bala and Goyal
(2000) the utility of player i [N] is given by
u
OW
i
(G) := /(l
i
(G); g
i
(G)); (13)
where g
i
(G) := [j [N[[(i; j) E(G)[ is the outdegree of player i, and
/(, ) is strictly increasing in the rst argument and strictly decreas-
ing in the second argument.
In the two-way ow model both linked players receive benets,
making it necessary to dene the closure of a directed network G.
This is the network G, dened by the property that (i; j) E(G) if
and only if (i, j) E(G) or (j, i) E(G). The set of players who are
accessible to i in the two-way ow model, C
i
(G), is then simply
the component to which player i belongs. Utility in the two-way
ow model is given by
u
TW
i
(G) := /(l
i
(G); g
i
(G)); (14)
such that above assumptions on / holds.
Since in one-sided network formation consent to link is not re-
quired, the concept of Nash equilibrium is more appealing than in
the undirected case. Formally, a Nash network is a network G such
that no single player has an incentive to create, respectively delete,
a subset of his links, given the links announced by all other players.
Given this denition, some of the ndings of Bala and Goyal (2000)
are summarized by the following proposition.
Proposition 3.8 Bala and Goyal (2000). Nash networks are either
minimally connected or empty in both the one-way ow model (13)
and the two-way ow model (14). Among those, only the empty
network and the wheel network are strict Nash networks for the
one-way ow model, and only the empty network and the
center sponsored star are strict Nash networks for the two-way ow
model.
24
The Bala and Goyal (2000) model has been extended along
various directions. In the framework of the one-way ow model
(13), Galeotti (2006) allows for heterogeneous benets and for
heterogeneous cost of connecting. Galeotti, Goyal, and Kam-
phorst (2006) allow for heterogeneity in the two-way ow model
(14). Both papers show that the basic equilibrium architectures
obtained in Bala and Goyal (2000) are quite robust. Even with
heterogeneous benets and cost, Nash networks are either min-
imal or empty, and also strict Nash networks share the same ba-
sic architectures as the homogeneous case, but can consist of
more than one non-singleton component such that the different
components consists of the basic equilibrium structures.
25
Intro-
ducing incomplete information, so that players can only observe
those parts of the network within some distance x, McBride
(2006) shows that for low enough values of x cycles may occur
(i.e. equilibrium networks are not necessarily minimal anymore)
and Nash networks may be disconnected in the two-way ow
model.
The fact that Nash networks are always minimal in the com-
plete information setting is driven by the assumption that players
benet from all accessible players equally, no matter how long
each path is. Bala and Goyal (2000) therefore introduce decay for
both the one-way ow and two-way ow model in a similar fash-
ion as the connections model (see Eq. (12)). For the latter case they
dene
u
TWd
i
(G) = 1
X
jC
i
(G)i
d
d
ij
(G)
g
i
c; (15)
with c being some positive constant. As a result, Bala and Goyal
(2000) get very similar architectures as Jackson and Wolinsky
(1996) for the connections model. Strict Nash networks are for
small costs (c < d d
2
) the complete network, for medium costs
(d d
2
< c < d) the star among others, and for high costs c > d
the empty network among others. Hojman and Szeidl (2008)
extend this approach and assume payoff structure u
HS
i
(G) =
f a
1
d
1
. . . a
D
d
D
( ) g
i
c where d
k
:=[{j [N]:d
ij
= k}[ such that f is
increasing and concave. Under some additional assumptions, they
show that the periphery sponsored star and an extended star are
unique Nash networks.
26
Another extension is due to Feri and
Melndez-Jimnez (2013) where co-evolution of networks and play
(also cf. Section 4.2) in the setup of the two-way ow model with
decay (15) is studied. In this paper, the decay is link specic and
endogenous since it depends on the actions taken by the (involved)
players in a coordination game.
22
Gallo (2012) renes the concepts of pairwise stability to cognitive stability to
account for the incomplete information setting.
23
Recall that ([N[ is used as general representation of the set of possible networks;
The direction of links is then clear from the context.
24
The notion of a minimal connected network depends on whether the network is
directed or undirected. A centersponsored star and a wheel network are depicted in
Fig. 1 and (ii). See Bala and Goyal (2000) for precise denitions.
25
In Galeotti et al. (2006), this holds when costs are player specic. However, when
costs are allowed to be heterogeneous with respect to links (called partner specic
costs), then different structures may emerge as strict Nash equilibria.
26
The periphery sponsored star is such that there exists a player i [N] (the center)
such that E(G) = {(j, i)[j [N], j i}, i.e. all links are directed from the peripheral
players to the center. In an extended star there is also a central player who does not
support any links. All peripheral players maintain a single link and from every
peripheral player there is a directed path to the center.
590 T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596
4. Evolutionary and co-evolutionary processes
4.1. Evolution
In the context of the connections model (cf. Sections 3.1.1 and
3.4), a natural adjustment dynamics is described by the improving
paths (Denition 3.2). Watts (2001) investigates the long-run
properties of such a dynamic explicitly. For intermediate costs such
that the star network is pairwise stable in the static model (i.e.
ensuring that the star is always an absorbing state of the dynamic
process), the likelihood that the process starting from the empty
network converges to the star goes to 0 as the number of players
N grows. The reason is that the myopic best-response dynamics
is path dependent. Once two distinct pairs of players form a link
(which is benecial when starting from the empty network), the
improving path will never lead to the star network.
To avoid path dependency Jackson and Watts (2002a) introduce
perturbations in the decisions of players in the spirit of evolution-
ary game theory (Kandori, Mailath, & Rob, 1993; Young, 1993).
These perturbations are interpreted as mistakes the players may
make when evaluating the protability of link. Formally the timing
of the process is as follows:
1. At each point in time t N a network G
t
([N[ is given and one
link ij E(G
c
) is selected according to a probability distribution
with full support on E(G
c
);
2. The link ij is added if ij ADD (G
t
); it is deleted if ij DEL (G
t
),
and it is not changed otherwise;
3. With probability > 0 the decision is reversed.
For every 0 < < 1 this process denes an irreducible Markov
chain on the set of networks ([N[. It therefore has a unique invari-
ant distribution l
(t)
tR
n o
(0;[
, dened on the nite state space A. The stochas-
tic process X
i
([x) D(S
i
). The mapping b
i
: A D(S
i
) is
called the choice function of player i.
Link creation: With constant rate k P0 the process allows the
network to expand. As in Section 2 we model this process by a
matrix-valued function W
: A R
NN
, whose elements are
bounded non-negative functions w
ij
(x), interpreted as the inten-
sity of link creation given the current state x A. For each x A
and > 0 the matrix W
: A R
NN
, whose elements are bounded non-negative
functions v
ij
(x). For each x A and > 0 the matrix V
(x) is sym-
metric, and called the volatility mechanism of the process.
Co-evolutionary processes are general enough to cover most
evolutionary models which have been studied in the literature. In
particular, evolutionary learning models on xed interaction struc-
tures are obtained by specializing the setting to k = n = 0. Second, it
is instructive to see that X
(t)}
tP0
taking values in the set
A
s
, with attachment mechanisms W
[
As
and V
[
As
. On an s-section
the intensities can only vary with the network. Our goal is to derive
a probability law dened over the set of possible networks, condi-
tional on the event that the players play according to the action
prole s, which we denote by P(s).
Assumption 4.1. The co-evolutionary process X
satises the
following assumptions:
(i) k, n > 0;
(ii) If A
ij
(x) = 0 and > 0, then w
ij
(x) > 0. If A
ij
(x) = 1 or i = j, then
w
ij
(x) = 0 for all ;
(iii) For all pairs of players i,j [N] and states x A we have
w
ij
(x) = j
ij
(r(x))(1 A
ij
(x)), and v
ij
(x) = d
ij
(r(x))A
ij
(x),
where j
ij
and d
ij
are positive functions.
The set of assumptions is not minimal in order to be able to ap-
ply Theorem 2.1 to characterize the conditional random graph
measure. Item (ii) is more restrictive than actually needed. The
only requirement we need is that the generator of the conditional
random graph process satises the necessary irreducibility
assumptions in order to guarantee the existence of a unique invari-
ant measure. However, item (iii) is necessary.
Item(iii) of Assumption 4.1 is arguably the most restrictive one. It
requires that the intensities of link creation and destruction are func-
tions only of the given action prole. One can imagine examples
where this assumption makes sense, but it is clear that many exam-
ples will not t this description. Nevertheless we can give the follow-
ing characterizationof the conditional randomgraphmeasure, which
is obtained froma straightforward application of Theorem 2.1.
Proposition 4.2. Consider a co-evolutionary process X
as dened
above whose attachment and volatility mechanism satises Assumption
4.1. Conditional on an action prole s S, the conditioned random
graph process {c
(t)}
tP0
has a unique invariant graph measure agreeing
with the probability measure of an inhomogeneous random graph
P
(G[s) =
Y
N
i=1
Y
j>i
(p
ij
(s))
A
ij
(G)
(1 p
ij
(s))
1A
ij
(G)
;
where p
ij
(s) :=
j
ij
(s)
j
ij
(s)d
ij
(s)
is the edge-success probability of vertex i and j.
4.3. Examples of co-evolutionary processes
Let us now present some simple examples of co-evolutionary
processes of networks and play. The rst example is a version of
a model due to Jackson and Watts (2002b). The second example
is a version of Staudigl (2011, 2013).
4.3.1. A co-evolutionary model based on pairwise stability
Jackson and Watts (2002b) combine the network formation
model of Jackson and Wolinsky (1996) (see Section 3.2) with the
dynamic network formation model due to Watts (2001), (see
Section 4.1).
29
The local interaction game is a symmetric 2 2
29
Jackson and Watts (2002b) describe a dynamic evolving in discrete periods. The
continuous-time version of their model given here differs in no substantial details,
because the stochastic law of motion is the one of a Markov jump process. The
discrete time models can be seen as embedded jump chains of the continuous-time
model. See, e.g. Stroock (2005) for a general reference, and Staudigl (2010) for an
explicit construction.
592 T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596
coordination game with action set S
1
= S
2
= {1, 2}. For each link
formed by a player, a xed marginal cost / > 0 has to be paid. The
utility function of player i is given by
u
i
(s; G) =
X
ji
p(s
i
; s
j
)A
ij
(G) /g
i
(G);
where p(1; s) =
a ifs = 1;
b ifs = 2
and p(2; s) =
c ifs = 1;
d ifs = 2:
The tuple
(a, b, c, d) are the payoff parameters of the underlying game,
satisfying the ordering a > c, b > d, and min{c,d} > 0.
30
Note that,
for a xed prole of actions, the marginal utility of the link ij for
player i is given exactly by mu
i
(G(x) ij,ij) = p(r
i
(x), r
j
(x)) /. The
co-evolutionary process is set up as follows:
Action adjustment: With rate 1 each player receives the oppor-
tunity to revise his action. Conditional on this event he selects
action s with probability
b
i
(s[x) =
1 ifs = arg max
s
/
1;2
u
i
((s
/
; r
i
(x)); G(x));
1 if r
i
(x) = s and r
i
(x) arg max
s
/
1;2
u
i
((s
/
; r
i
(x)); G(x));
otherwise:
8
>
>
>
<
>
>
>
:
This choice function says that a player abandons his currently used
action with relatively high probability 1 , if there exists a strictly
better action. Otherwise he sticks to his action and switches only
with the relatively small probability .
31
Link creation: With rate
k > 0 a link becomes created. Jackson and Watts (2002b) model
network formation in the avor of pairwise stability as dis-
cussed in Section 3. Let
ADD(x) = ij E(G
c
) E(G(x))[p(r
i
(x); r
j
(x))
> /; and p(r
j
(x); r
i
(x)) P/
be the set of links that are mutually protable. Similarly we dene
DEL(x) = ij E(G(x))[p(r
i
(x); r
j
(x)) < /; or p(r
j
(x); r
i
(x))
< /:
Jackson and Watts (2002b) assume that a previously non-existing
link becomes active with probability 1 if both players mutually
agree. With the small probability all links have a chance to be
formed. The rate that a currently non-existing link ij will be
added is
\(i; j) R E(G(x)) : w
ij
(x) :=
1
[ADD(x)[
[E(G
c
G(x))[
if ij ADD(x);
[E(G
c
G(x))[
otherwise:
(
Link destruction: With rate n > 0 links become destroyed. Con-
ditional on this event, pick one edge ij E(G(x)) uniformly at
random and allow the incident players to re-evaluate the bene-
ts arising from this connection. If ij is a link where at least one
player is better off after its deletion it is assumed that with large
probability 1 it will be destroyed. With the small probability
every active link can be destroyed. This leads to the following
version of the volatility mechanism:
\(i; j) E(G(x)) : v
i;j
(x) =
1
[DEL(x)[
[E(G(x))[
if ij DEL(x);
[E(G(x))[
otherwise:
(
Clearly this model is a version of a co-evolutionary process. The
attachment and volatility mechanism depends however in a non-
trivial way on the current network and the action chosen by the
players, so that we cannot apply Proposition 4.2 to this model.
However, this model can still be quite well understood in the ex-
treme case where ?0. Taking this limit, Jackson and Watts
(2002b) show that the complete network will be observed most
of the time (i.e. it is a stochastically stable state), and the players
coordinate on a single strongly symmetric action prole. The inter-
esting open question is which of the two symmetric equilibria will
be played. Jackson and Watts (2002b) provide an exhaustive char-
acterization of the long-run equilibria in this model.
32
Proposition 4.3 (Preposition 1, Jackson and Watts (2002b)). Sup-
pose that N is sufciently large. The unique stochastically stable states
of the co-evolutionary model with constant linking costs / > 0 consist
of the complete network and the following pattern of play:
(i) If a / > 0 and d / > 0 then either all players play action 1 or
action 2.
(ii) If b / > 0 and c / > 0 then all players play action 1.
(iii) If b / < 0 and/or d / < 0, and a / > 0 and d / > 0, then
either all play 1 or all players play 2.
Related to the Jackson and Watts (2002b) model is the coordi-
nation game scenario investigated by Goyal and Vega-Redondo
(2005). Their paper is based on the two-way ow model of Bala
and Goyal (2000), but adds the additional layer of complexity by
allowing agents to derive utility from a coordination game as in
Jackson and Watts (2002b). In the spirit of the two-way ow mod-
el, the unit of a one-step transition is not the edge, but the single
individual. Specically, Goyal and Vega-Redondo (2005) envision
a dynamic co-evolutionary process in which at each time step a
single individual receives a revision opportunity (independent of
the other players) in which she can simultaneously change her
action played in the coordination and the set of links she would like
to support in the network realized in the next period. Once a
network is realized, the agents play the coordination game p with
all their neighbors. Thus, if G is the closure of the network G
(cf. Section 3.5), player is total instantaneous payoff is
P
ji
p(a
i
; a
j
)A
ij
(G). Each initiated link has some costs / > 0, which
have to be paid only by the initiator. Hence, the utility function
in the Goyal and Vega-Redondo (2005) model is
u
i
(s; G) =
X
ji
p(a
i
; a
j
)A
ij
(G) /g
i
(G):
Using this payoff specication, the main result of Goyal and
Vega-Redondo (2005) is the following.
Proposition 4.4 (Theorem 3.1, Goyal and Vega-Redondo
(2005)). Suppose the stage game p is a coordination game with data
a + b < c + d, and a > d. There exists a value
/ (b; d) such that for
/ <
/ the unique stochastically stable conguration is the complete
network in which all agents play action 2. If / (
i
(s[x; s
i
) =
exp u
i
((s; r
i
(x)); G(x); s
i
)= [ [
P
s
/
S
exp u
i
((s
/
; r
i
(x)); G(x); s
i
)= [ [
:
The rate of the transition x = (~s; G) x
/
= ((s; r
i
(x)); G(x)) is thus
b
i
(s[x; s
i
).
Link creation: The attachment mechanism is given by a collec-
tion of functions j
(s; s
/
)
(s;s
/
)SS
, dened as
j
(s; s
/
) =
2
N
exp(p(s; s
/
)=) \s; s
/
S:
The rate of a transition x = (~s; G) x
/
= (~s; G ij) is then given by
k(1 A
ij
(x))j
(r
i
(x), r
j
(x)).
Link destruction: The volatility mechanism is
v
ij
(x) = d
s
i
;s
j
;
where d
k;l
= d
l;k
is the volatility rate of a link between a player of
type k and a player of type l. The rate of the transition
x = (~s; G) x
/
= (~s; G(x) ij) is then given by nA
ij
(x)d
s
i
;s
j
.
As shown in Staudigl (2013) this model can be completely ana-
lyzed using elementary arguments. The (strong) assumptions mak-
ing the model tractable are the strong symmetry of the reward
function p and the particular specication of the volatility and
attachment mechanism. Working with these assumptions, the
long-run properties of the stochastic dynamics can be completely
understood.
Theorem 4.5 (Staudigl (2011, 2013)). The unique invariant distri-
bution of the co-evolutionary process X
;s
N
(t)
tP0
is the Gibbs
measure
l
;s
N
(x) =
exp(
1
H
N
(x; s))
P
x
/
A
exp(
1
H
N
(x
/
; s))
=
l
;s
0;N
(x) exp
1
q(x; s)
P
x
/
A
l
;s
0;N
(x
/
) exp(
1
q(x
/
; s))
; (16)
where, for all x = (s; G) A,
H
N
(x; s) := q(x; s) log l
;s
0;N
(x);
l
;s
0;N
(x) :=
Y
N
i=1
Y
j>i
2
Nd
s
i
;s
j
!
A
ij
(G)
;
q(x; s) :=
1
2
X
ji
A
ij
(G)p(r
i
(x); r
j
(x))
X
i
s
i
(s
i
):
We can use the measure l
;s
N
to derive a random graph measure
over the~s-section A~s
. The random graph process {c
,s
(t)}
tP0
dened
on ([N[ for a xed prole of actions~s S
N
can be formally identied
with a birthdeath process with birth rates of the link ij given by 2
exp (p(s
i
, s
j
)/), and death-rates d
s
i
;s
j
. Calling the rate ratio
u
k;l
(s; s
/
) =
2 exp(p(s; s
/
)=)
d
k;l
;
for s, s
/
S and 1 6 k, l 6 m, Staudigl (2013) goes on in proving the
following result.
Proposition 4.5. Consider the random graph process described
above. This process is ergodic with unique invariant graph measure
P
;s
N
(G[~s) =
Y
N
i=1
Y
j>i
p
ij
(~s; s)
A
ij
(G)
1 p
ij
(~s; s)
(1A
ij
(G))
;
where the edge-success probabilities are dened as
p
ij
(~s; s) =
u
k;l
(s; s
/
)
u
k;l
(s; s
/
) N
if s
i
= s; s
j
= s
/
; s
i
= h
k
; s
j
= h
l
(17)
for all i, j [N].
The proof of this Proposition is a simple application of Proposi-
tion 4.2. The interpretation of this result is as follows. For a xed
action prole ~s and known type prole, the stationary probability
distribution over graphs will be an inhomogeneous random graph
(cf. Section 2.2.1), with edge-success probabilities dened as in
eq. (17).
34
5. Summary and suggestions for future research
In this survey we have tried to give a short overview on a partic-
ular class of models designedfor the modeling of the dynamic evolu-
tion of networks. Random graph models are combined with game
theorytoformalizetheco-evolutionof networks andplay. This mod-
eling approachreects the interdisciplinary character of researchon
dynamic networks (both theoretical and applied). The models
touched in this survey can and should be considered as only preli-
minary steps towards a more general theory. In the following lines
we give some suggestions for future research and their challenges.
33
Models with similar payoff structure are frequently encountered in economic
models with local interactions. See e.g. Brock and Durlauf (2001), and the references
therein.
34
Staudigl (2013) goes on in characterizing the supports of the invariant measure
l
;s
N
as e ?0 (the so-called stochastically stable states mentioned in Section 4.1), and
also derives the large deviation rate function of this measure in the limit of large
player sets, i.e. where N ?.
594 T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596
5.1. Weighted networks
As mentioned in Section 1, we have avoided any discussion of
weighted networks in this survey. The simple reason for this is that
we feel that there is not a satisfactory theory out there in the mo-
ment. Much more efforts should be devoted to this very important
class of networks, which are so prevalent in applications.
5.2. Mechanism design of networks
In many practical situations a system controller would like to
ensure that a certain network structure will be achieved via decen-
tralized decision making of the players. In such a model a control-
ler collects a map of the vertices preferences before evolution
starts, and given these data, a tax/subsidy scheme is designed so
that a certain network architecture will be the outcome (at least
with high probability).
35
It is an interesting question how such a
model extends to a dynamic evolutionary setting. We envision a
Bayesian interaction model as in Section 4.3.2 as a reasonable mod-
eling approach for this endeavor. Related to this question, we think
that it is important to invest more effort to understand the connec-
tion between structural features of the players utility functions and
the structure of stable networks (see Sections 3.3, 3.4 and 3.5), but
there is room for improvement. General characterizations of stable
networks are so far missing (e.g. necessary conditions for existence
and uniqueness or general conditions for emergence of particular
networks). An important contribution to foster our understanding
of incentive-driven network formation models is to start with a
class of network games (potential games would be a reasonable
starting point) and investigate the question how equilibrium net-
work topologies change when basic properties of the utility function
change. This is not only an important theoretical question, but may
also be important for statistical identication.
Acknowledgments
We would like to thank the editor and four anonymous referees
for their very constructive comments on earlier versions of this
survey. Mathias Staudigl acknowledges nancial from the Vienna
Science and Technology Fund (WWTF) under project fund MA
09-017.
References
Albert, R., & Barabsi, A.-L. (2002). Statistical mechanics of complex networks.
Reviews of Modern Physics, 74, 4797.
Bala, V., & Goyal, S. (2000). Non-cooperative model of network formation.
Econometrica, 68(5), 11811229.
Ballester, C., Calv-Armengol, A., & Zenou, Y. (2006). Whos who in networks.
Wanted: The key player. Econometrica, 74(5), 14031417.
Barabsi, A., & Albert, R. (1999). Emergence of scaling in random networks. Science,
286, 509512.
Barthlemy, M., Barrat, A., Pastor-Satorras, R., & Vespignani, A. (2005).
Characterization and modeling of weighted networks. Physica A: Statistical
Mechanics and its Applications, 346(12), 3443.
Belleamme, P., & Bloch, F. (2004). Market sharing agreements and collusive
networks. International Economic Review, 45(2), 387411.
Bloch, F., & Dutta, B. (2009). Communication networks with endogenous link
strength. Games and Economic Behavior, 66(1), 3956.
Bloch, F., & Jackson, M. (2006). Denitions of equilibrium in network formation
games. International Journal of Game Theory, 34(3), 305318.
Bloch, F., & Jackson, M. O. (2007). The formation of networks with transfers among
players. Journal of Economic Theory, 133(1), 83110.
Blume, L. (1993). Statistical mechanics of strategic interaction. Games and Economic
Behavior, 5, 387424.
Bollobs, B. (2008). Random graphs (2nd ed.). Cambridge University Press.
Bollobs, B., Janson, S., & Riordan, O. (2007). The phase transition in inhomogeneous
random graphs. Random Structures and Algorithms, 31(1), 3122.
Bonacich, P. (1987). Power and centrality: A family of measures. American Journal of
Sociology, 92(5), 11701182.
Brock, W. A., & Durlauf, S. N. (2001). Discrete choice with social interactions. The
Review of Economic Studies, 68(2), 235260.
Buechel, B., & Hellmann, T. (2012). Under-connected and over-connected networks:
The role of externalities in strategic network formation. Review of Economic
Design, 16, 7187.
Buskens, V., & van de Rijt, A. (2008). Dynamics of networks if everyone strives for
structural holes. American Journal of Sociology, 114, 371407.
Calv-Armengol, A., & Ilkili, R. (2009). Pairwise-stability and Nash equilibria in
network formation. International Journal of Game Theory, 38(1), 5179.
Candogan, O., Menache, I., Ozdaglar, A., & Parrilo, P. A. (2011). Flows and
decompositions of games: Harmonic and potential games. Mathematics of
Operations Research, 36(3), 474503.
Chakrabarti, S., & Gilles, R. (2007). Network potentials. Review of Economic Design,
11(1), 1352.
Chatterjee, S. & Diaconis, P. (2011). Estimating and understanding exponential random
graphs. arXiv:1102.2650v3 [math.PR].
Chung, F. & Lu, L. (2006). Complex graphs and networks. In CBMS regional conference
series in mathematics.
Dawid, H. & Hellmann, T. (2012). The evolution of R&D networks. Working Papers
467. Bielefeld University, Institute of Mathematical Economics.
Dodds, P., Muhamad, R., & Watts, D. (2003). An experimental study of search in
global social networks. Science, 301(5634), 827829.
Dorogovtsev, S., & Mendes, J. (2003). Evolution of networks-from biological nets to the
internet and WWW. Oxford University Press.
Durrett, R. (2007) Random graph dynamics. Cambridge Series in Statistical and
Probabilistic Mathematics.
Dutta, B., Ghosal, S., & Ray, D. (2005). Farsighted network formation. Journal of
Economic Theory, 122(2), 143164.
Dutta, B., & Mutuswami, S. (1997). Stable networks. Journal of Economic Theory,
76(2), 322344.
Easley, D., & Kleinberg, J. (2010). Networks, crowds and markets reasoning about a
higly connected world. Cambridge, UK: Cambridge Univ. Press.
Echenique, F., Lee, S., Shum, M., & Yenmez, M. B. (2013). The revealed preference
theory of stable and extremal stable matchings. Econometrica, 81(1),
153171.
Ehrhardt, G., Marsili, M., & Vega-Redondo, F. (2006). Diffusion and growth in an
evolving network. International Journal of Game Theory, 34, 383397.
Ellison, G. (1993). Learning, local interaction, and coordination. Econometrica, 61(5),
10471071.
Erds, P., & Rnyi, A. (1959). On random graphs i. Publicationes Mathematicae, 6,
290297.
Erds, P., & Rnyi, A. (1960). On the evolution of random graphs. Publications of the
Mathematical Institute of the Hungarian Academy of Sciences, 5, 1761.
Feri, F. (2007). Stochastic stability in networks with decay. Journal of Economic
Theory, 135(1), 442457.
Feri, F., & Melndez-Jimnez, M. A. (2013). Coordination in evolving networks with
endogenous decay. Journal of Evolutionary Economics.
Fienberg, S. E., Meyer, M. M., & Wasserman, S. S. (1985). Statistical analysis of
multiple sociometric relations. Journal of the American Statistical Association,
80(389), 5167.
Frank, O., & Strauss, D. (1986). Markov graphs. Journal of the American Statistical
Association, 81(395), 832842.
Freeman, L. (1979). Centrality in social networks: Conceptual clarication. Social
Networks, 1(3), 215239.
Freidlin, M., & Wentzell, A. (1998). Random perturbations of dynamical systems (2nd
ed.). New York: Springer Verlag.
Galeotti, A. (2006). One-way ow networks: The role of heterogeneity. Economic
Theory, 29(1), 163179.
Galeotti, A., Goyal, S., & Kamphorst, J. (2006). Network formation with
heterogeneous players. Games and Economic Behavior, 54, 353372.
Gallo, E. (2012). Small world networks with segregation patterns and brokers.
Review of Network Economics, 11(3).
Gilbert, E. N. (1959). Random graphs. The Annals of Mathematical Statistics, 30(4),
11411144.
Gilles, R. & Sarangi, S. (2005). Stable networks and convex payoffs. Discussion Paper
2005-84, Tilburg University, Center for Economic Research.
Goldenberg, A., Zheng, A. X., Fienberg, S. E., & Airoldi, E. M. (2009). A survey of
statistical network models. Foundations and Trends in Machine Learning, 2(2),
129233.
Golub, B. & Jackson, M. (2012). How homophily affects the speed of learning and
best-response dynamics. The Quarterly Journal of Economics, 127(3).
Goyal, S. (2005). Learning in networks. In G. Dema nge & M. Wooders (Eds.), Group
formation in economics: Networks, clubs and coalitions (pp. 122167). Cambridge
University Press.
Goyal, S. (2007). Connections. Princeton: Princeton Univ. Press.
Goyal, S., & Joshi, S. (2003). Networks of collaboration in oligopoly. Games and
Economic Behavior, 43(1), 5785.
Goyal, S., & Joshi, S. (2006). Unequal connections. International Journal of Game
Theory, 34(3), 319349.
35
For motivation, reconsider the local complementarity model of Section 3.1.2.
Assuming Nash equilibrium play in the game where players choose efforts, we can
now use this derived preference relation over graphs (7) to investigate the
equilibrium payoffs as functions of the interaction structure. This leads naturally to
questions of mechanism design and network optimization, both of which are very
important questions in economics and operations research.
T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596 595
Goyal, S., Van Der Leij, M. J., & Moraga-Gonzlez, J. L. (2006). Economics: An
emerging small world. Journal of Political Economy, 114(2), 403412.
Goyal, S., & Vega-Redondo, F. (2005). Network formation and social coordination.
Games and Economic Behavior, 50, 178207.
Goyal, S., & Vega-Redondo, F. (2007). Structural holes in social networks. Journal of
Economic Theory, 137(1), 460492.
Hellmann, T. (2013). On the existence and uniqueness of pairwise stable networks.
International Journal of Game Theory, 42, 211237.
Hojman, D. A., & Szeidl, A. (2008). Core and periphery in networks. Journal of
Economic Theory, 139(1), 295309.
Jackson, M. O. (2003). The stability and efciency of economic and social networks.
In M. Sertel & S. Koray (Eds.), Advances in economic design. Heidelberg: Springer-
Verlag.
Jackson, M. O. (2005). A survey of models of network formation: stability and
efciency. In G. Demange & M. Wooders (Eds.), Group formation in economics:
Networks, clubs and coalitions (pp. 1149). Cambridge University Press.
Jackson, M. O. (2008). Social and economic networks. Princeton University Press.
Jackson, M. O., & Rogers, B. W. (2005). The economics of small worlds. Journal of the
European Economic Association, 3(23), 617627.
Jackson, M. O., & Rogers, B. W. (2007). Meeting strangers and friends of friends: How
random are social networks? American Economic Review, 97(3), 890915.
Jackson, M. O., & Watts, A. (2001). The existence of pairwise stable networks. Seoul
Journal of Economics, 14(3), 299321.
Jackson, M. O., & Watts, A. (2002a). The evolution of social and economic networks.
Journal of Economic Theory, 106, 265295.
Jackson, M. O., & Watts, A. (2002b). On the formation of interaction networks in
social coordination games. Games and Economic Behavior, 41, 265291.
Jackson, M. O., & Wolinsky, A. (1996). A strategic model of social and economic
networks. Journal of Economic Theory, 71, 4474.
Johnson, C., & Gilles, R. P. (2000). Spatial social networks. Review of Economic Design,
5(3), 273299.
Kandori, M., Mailath, G., & Rob, R. (1993). Learning, mutation, and long run
equilibria in games. Econometrica, 61, 2956.
Karrer, B., & Newman, M. E. J. (2011). Stochastic blockmodels and community
structure in networks. Physical Review E, 83, 016107.
Kumpula, J. M., Onnela, J.-P., Saramki, J., Kaski, K., & Kertsz, J. (2007). Emergence of
communities in weighted networks. Physical Review Letters, 99, 228701.
Marsili, M., Vega-Redondo, F., & Slanina, F. (2004). The rise and fall of the networked
society: A formal model. PNAS, 101, 14391442.
McBride, M. (2006). Imperfect monitoring in communication networks. Journal of
Economic Theory, 126(1), 97119.
McPherson, M., Smith-Lovin, L., & Cook, J. M. (2001). Birds of a feather: Homophily
in social networks. Annual Review of Sociology, 27(1), 415444.
Milgram, S. (1967). The small world problem. Psychology Today, 2, 6067.
Mhlmeier, P., Rusinowska, A., & Tanimura, E. (2013). A degree-distance-based
connections model with negative and positive externalities. Technical report. IMW,
Bielefeld University.
Monderer, D., & Shapley, L. (1996). Potential games. Games and Economic Behavior,
14, 124143.
Morris, S. (1997). Interaction games: A unied analysis of incomplete information, local
interaction and random matching. <http://ssrn.com/abstract=290880 or http://
dx.doi.org/10.2139/ssrn.290880>.
Myerson, R. B. (1991). Game theory: Analysis of conict. Harvard University Press.
Newman, M. (2003a). Hanbook of graphs and networks, Random graph models as
models of networks. Wiley-VCH (chapter 2, pp. 3565).
Newman, M. (2003b). The structure and function of complex networks. SIAM
Review, 45(2), 167256.
Newman, M. E. J. (2004). Coauthorship networks and patterns of scientic
collaboration. Proceedings of the National Academy of Science (USA), 101,
52005205.
Nisan, N., Roughgarden, T., Tardos, va, & Vazirani, V. V. (2007). Algorithmic game
theory. Cambridge University Press.
Park, J., & Newman, M. E. J. (2004). The statistical mechanics of networks. Physical
Review E, 70. 066117-1066117-15.
Persitz, D. (2010). Power and core-periphery networks. Technical report.
Robins, G., Pattison, P., Kalish, Y., & Lusher, D. (2007). An introduction to
exponential random graph (p
*
) models for social networks. Social Networks,
29(2), 173191.
Sandholm, W. (2010a). Evolutionary dynamics and population games. The MIT Press.
Sandholm, W. H. (2010b). Decompositions and potentials for normal form games.
Games and Economic Behavior, 70(2), 446456.
Sandholm, W. H., & Pauzner, A. (1998). Evolution, population growth, and history
dependence. Games and Economic Behavior, 22(1), 84120.
Snijders, T. A. B. (2001). The statistical evaluation of social network dynamics.
Sociological Methodology, 31, 361395.
Snijders, T. A. B., Pattison, P. E., Robins, G. L., & Handcock, M. S. (2006). New
specications for exponential random graph models. Sociological Methodology,
36, 99153.
Sderberg, B. (2002). General formalism for inhomogeneous random graphs.
Physical Review E, 66. 066121-1066121-6.
Staudigl, M. (2010). Co-evolutionary dynamics of networks and play. Ph.D. thesis.
University of Vienna.
Staudigl, M. (2011). Potential games in volatile environments. Games and Economic
Behavior, 72, 271287.
Staudigl, M. (2012). Stochastic stability in asymmetric binary choice coordination
games. Games and Economic Behavior, 75, 372401.
Staudigl, M. (2013). Co-evolutionary dynamics and bayesian interaction games.
International Journal of Game Theory, 42(1), 179210.
Stroock, D. (2005). An introduction to markov processes. Graduate texts in mathematics
230. Berlin, Heidelberg, New York: Springer.
Tardos, E., & Wexler, T. (2007). Algorithmic game theory, Network formation games
and the potential function method. Cambridge University Press (Chapter 19, pp.
487513).
Tercieux, O., & Vannetelbosch, V. (2006). A characterization of stochastically stable
networks. International Journal of Game Theory, 34(3), 351369.
Van den Nouweland, A. (2005). Models of network formation in cooperative games.
In G. Demange & M. Wooders (Eds.), Group formation in economics; networks,
clubs, and coalitions (pp. 5888). Cambridge University Press.
Vega-Redondo, F. (2007). Complex social networks. Econometric society monograph
series. Cambridge University Press.
Wasserman, S. (1980). Analyzing social networks as stochastic processes. Journal of
the American Statistical Association, 75(370), 280293.
Wasserman, S., & Faust, K. (1994). Social network analysis. Cambridge Univ. Press.
Watts, D. J. (1999). Small worlds. Princeton, NJ: Princeton Univ. Press.
Watts, A. (2001). A dynamic model of network formation. Games and Economic
Behavior, 34(2), 331341.
Watts, D. J., & Strogatz, S. H. (1998). Collective dynamics of small-world networks.
Nature, 393(6684), 440442.
Weibull, J. (1995). Evolutionary game theory. Massachusetts: The MIT Press
Cambridge.
Young, H. (1993). The evolution of conventions. Econometrica, 61(1), 5784.
Young, H. (1998). Individual strategy and social structure An evolutionary theory of
institutions. Princeton University Press.
596 T. Hellmann, M. Staudigl / European Journal of Operational Research 234 (2014) 583596