Brokerage rents and intermediation networks

Area of Science:

• Economics
• Network Science
• Behavioral Economics

Background:

• Intermediation networks are crucial for economic transactions.
• Understanding network formation under different economic incentives is key.
• Previous research has explored network stability but less on pricing rule impacts.

Purpose of the Study:

• To experimentally investigate the economic determinants of intermediation network structures.
• To compare network outcomes under two distinct pricing rules: criticality and betweenness.
• To analyze the effect of group size (10, 50, 100 subjects) on network stability and payoff distribution.

Main Methods:

• Experimental economics design with human subjects.
• Simulations of network formation under controlled pricing rules.
• Analysis of network topology, path lengths, and payoff inequality across different group sizes.

Main Results:

• Under criticality pricing, stable networks formed interconnected cycles, with modest growth in path length and inequality as group size increased.
• Under betweenness pricing, stable networks featured a few dominant hubs, leading to unchanged path lengths but exploding linking and payoff inequality with larger groups.
• The distribution of brokerage benefits significantly alters network architecture and economic outcomes.

Conclusions:

• Pricing rules fundamentally shape the structure and fairness of economic intermediation networks.
• The criticality rule promotes more decentralized and equitable networks compared to the betweenness rule.
• Network design and incentive structures are critical for mitigating extreme inequality in economic systems.