Network Economics with Application to Finance


Nicholas Economides*


Networks are common in financial services. Perfect competition does not decentralize optimality on a network, and coordination of participants expectations and investments is crucial for success. Financial exchange networks exhibit two kinds of externalities: liquidity enhancement by size expansion, and underpriced provision of market price information to outside rivals. We discuss the interaction of these externalities in alternative exchange network structures.

Published in Financial Markets, Institutions & Instruments, vol. 2, no. 5, December 1993, pp. 89-97.

* Stern School of Business, New York University, New York, NY 10012-1126. (212) 998-0864, FAX (212) 995-4812, e-mail:

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