DP15582 Perceived Competition in Networks

Author(s): Olivier Bochet, Mathieu Faure, Yan Long, Yves Zenou
Publication Date: December 2020
Keyword(s): eigenvector centrality, policies, Social Networks
JEL(s): C72, D85
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15582

Agents compete for the same resources and are only aware of their direct neighbors in a network. We propose a new equilibrium concept, referred to as peer-consistent equilibrium (PCE). In a PCE, each agent chooses an effort level that maximizes her subjective perceived utility and the effort levels of all individuals in the network need to be consistent. We develop an algorithm that breaks the network into communities. We use this decomposition to completely characterize peer-consistent equilibria by identifying which sets of agents can be active in equilibrium. An agent is active if she either belongs to a strong community or if few agents are aware of her existence. We show that there is a unique stable PCE. We provide a microfoundation of eigenvector centrality, since, in any stable PCE, agents' effort levels are proportional to their eigenvector centrality in the network.