AC345 Social and Organisational Dimensions of Markets Lecture 5: Markets as organisations

1
AC345 - Social and Organisational Dimensions of
Markets Lecture 5 Markets as organisations

• Yuval Millo
• AFM, Essex

2
Changes to lecture and class next week

• Instead of the usual times
• Lecture
• Thursday, 1100 1300 Room 5N.4.6
• Class
• Friday, 18/11, 1100 -1200 , Room 4N.2.3

3
Review 1

• Social networks provide access to information,
  resources and allow sharing and coordination
• In general, the more connections an actors
  possesses, the better his/her potential relative
  position would be. Today we will qualify this
  statement
• There are limitations to size
• Networks restrict actions by imposing normative
  behaviour

4
Review 2

• The strength of the ties network affects the type
  of economic activity among the actors.
• Embedded ties close relationship between
  actors. Stable structure of network
• Arm length ties - impersonal, diffuse relations.
  Dynamic changes in structure

5
Networks measures
Network Density
Density is the average value of the relation
among all pairs of ties.
1 2 3 4 5
1
1
1 2 3 4 5
1
1
1
D (or ?) 0.5
6
Transivity
B

• Transitivity - the tendency of one's friends'
  friends to be one's friends as well.
• We see that the indirect connection A-B-C is
  redundant because A-C connects the two actors.

A
C
7
Structural Holes Weak Ties
Effective Size
The effective size is the number of actors to
which a single actor is connected, minus the
redundancy in the network. Effective size
Size - Redundancy
8
Types of network structure and economic decisions

• Strength of Weak Ties Granovetter (SWT)
• Only bridging weak ties are of special value to
  individuals.
• Why?
• Connection with actors who are not connected to
  each other brings fresh blood to the system
• So, weak ties are far more likely to be bridges
  than are strong ones.

9
Structural holes
Image from www.analytictech.com
10
Weak Ties and Structural Holes (SH)

• For the individual, using weak ties and SH would
  be important because they may increase that
  persons social capital
• From a market perspective, structural holes may
  induce
• Higher liquidity
• Innovation

11
Number of market agents and market behaviour

• Neoclassical economics expects markets be more
  efficient as number of agents grow.
• Yet, communication and coordination become
  difficult as numbers grow.
• So, beyond a certain size, the crowd breaks down
  to smaller units within each almost all trading
  is conducted.
• That is, instead of a homogeneous, large crowd,
  as economic theory assumes, the crowd, in effect
  breaks down smaller trading units.

12
Number of market agents and market behaviour

• Price volatility increases as more traders join
  the trade. Under similar conditions, the small
  crowds would produce better prices then the
  bigger ones.
• In addition, imposing reciprocity norms is easier
  in small crowds than in large ones

13
Informal Self-regulation and market structure

• Baker shows that agents do not only engage in
  economic activities, but they regulate their
  environment perform normative tasks. For
  example, I will only trade with market makers
  who fulfil their obligations.
• Spatial arrangements also restrict the number of
  potential partners, as those who stand next to
  each are more likely to develop trading
  relationships.

14
The role of networks in economic decisions

• According to economic theory consumers would like
  to maximize their potential sellers.
• So, why do people buy from others within their
  social network?
• The choice of transaction partners is restricted
• The membership in an embedded network provides
  security