Strategic Random Networks: Why Social Networking Technology Matters

TL;DR

This paper develops a strategic model of random social networks showing how social networking services can significantly influence network structure and social welfare through subtle changes in costs and benefits.

Contribution

It introduces a novel strategic framework for understanding how social networking platforms impact network formation and social welfare.

Findings

Large changes in network density can occur with small shifts in perceived benefits.

A sharp transition exists from sparse to dense networks at a critical threshold.

The model explains how social platforms can reduce network inefficiencies.

Abstract

This paper develops strategic foundations for an important statistical model of random networks with heterogeneous expected degrees. Based on this, we show how social networking services that subtly alter the costs and indirect benefits of relationships can cause large changes in behavior and welfare. In the model, agents who value friends and friends of friends choose how much to socialize, which increases the probabilities of links but is costly. There is a sharp transition from fragmented, sparse equilibrium networks to connected, dense ones when the value of friends of friends crosses a cost-dependent threshold. This transition mitigates an extreme inefficiency.