An article on power in social networks in a business context.

When Unequals Try to Merge as Equals

Recently in class we’ve been talking about power in social networks. This article in the New York Times discusses a merger between XM Satellite Radio and Sirius Satellite Radio. The tricky part of this merger is that Sirius, according to the stock market, is worth much more than XM, but they’re saying that the merger is between equals. So why is Sirius paying a 22 percent premium to XM’s shareholders? Shouldn’t Sirius be holding more of the power in this relationship?

As we learned, power in networks lies in four principles: dependence, exclusion, satiation, and betweenness. Satiation does not have much to do with this merger, and, as both companies seem to be doing well enough, exclusion and betweenness does not either. However, dependence played a very large role. Sirius originally began with an offer to buy the company, and when that failed, XM pushed for a deal where Sirius paid a premium. XM didn’t really think Sirius was worth much more than XM and XM knew “they needed each other” to produce the expected savings, and used that to their advantage. Because of the dependence on each other, these companies determined it was best to merge rather than fight over who would own the majority of the company. This is similar to the 2-node example in class, when the dollar is split in half. XM and Sirius do not have other choices for mergers that would be as successful, thus, it makes sense to split the profits in the middle.

In class we have discussed in good detail second-price sealed bid auctions. It’s easy to see that the deciding factors in the simple cases we looked at are purely economic. The optimal strategy for any bidder is to bid their private value - any more and they might pay too much, any less and they might lose at a price they were willing to pay.

Interesting things begin to happen in second-price auctions, however, when bidders are allowed multiple bids over a prolonged span of time. The question to ask is how do bidders react when they are no longer bidding on their own, but interacting with others in real time? An article published in The Journal of Interactive Marketing entitled Auction Fever: The Effect of Opponents and Quasi-Endowment on Product Valuations tackles just this question. The authors state that the outcome of such an auction is no longer based solely on economics, but on the psychological factors affecting all the potential buyers involved. They describe two main contributors to these effects: competition and what they have labeled quasi-endowment.

Competition, or what they call the “Opponent Effect” is straight-forward. For many people, participating in a multiple bid auction provides the sort of thrill of competition one would expect to see in any sport. It’s very easy to get into the competitive spirit of things without realizing the effect it has on you. The authors note that most people refer to a positive outcome as having “won”, not having “bought”, an item, and likewise for a negative outcome. This effect often causes bidders to get caught up in the moment, potentially bidding more than their private value. It becomes more important to win the perceived fight than to obtain the prize.

Quasi-endowment can be described as the effect a person feels towards an object that they possess. While it is true that in the case of an auction the buyer does not own the item in question, the authors argue that develop a sense of ownership of the item during the period in which they are the high bidder. The longer a person holds the high bid seat, the more of an attachment they develop for the item. This attachment leads to a heightened impact of a loss of the item, whether at the end of the auction or just for a short period of time. This effect has a strong psychological impact that reduces one’s ability to think rationally about the auction in progress.

Multiple biding puts bidders at a great risk of temporary irrationality (or for some, even temporary insanity). They quickly lose the ability to play the game as the intended at the start, and can very easily end up with a decidedly negative payoff. If this is the case, is it even worth it to try?

In class we have gone over four main types of auctions: ascending bid, descending bid, first priced sealed bid and second price sealed bid. So far our discussions have focused on independent private values for individual items, but what if there are multiple items and bidders have different valuations depending on what combination of items they receive? Combinatorial auctions allow bidders have valuations for bundles of items.

As an example, let’s say you are bidding on 20 plots of land. You require eight plots of land (a 2 by 4 rectangle) adjacent to a road for a house you want to build. Your valuation for this combination is the highest. If you only win four plots of land that are adjacent to each other you can’t have that big back yard you wanted (a medium valuation). If you win eight plots of land scattered across the area, your plans will not work at all (the lowest valuation). Because there is a high risk of getting scattered land, you may not bid at all. If the seller realizes there is a high demand for adjacent plots, the seller could package plots of land together. Bidders, such as your self, would feel more confident in placing bids because you are guaranteed adjacent plots. Now the set of items up for auction decreases while your valuation for each combination of plots remains the same. You are guaranteed useful land if you win a bid on an area that meets your requirements.

Holland and O’ Sullivan’s paper Super Solutions for Combinatorial Auctions deals with finding items the seller can package together to maximize revenue. The paper focuses on sets of solutions that are within a certain percentage of the optimum revenue called super solutions. These super solutions can partially account for the unreliability of bidders (e.g. withdrawing or disqualifying bids) by providing a set of solutions instead of only one. Because combinatorial auctions allow the bidder to express complex relationships between bids for different items, it is important to have sets of solutions in the same sense bidders have sets of valuations.

This paper offers a broader introduction to combinatorial auctions.

Reference:  Kerness, Bonnie.  “Solitary Confinement Torture in the U.S.” 1998.  http://sonic.net/~doretk/Issues/98-09%20FALL/solitary.html

            In her article about the implementation of solitary confinement and sensory deprivation in federal and state prisons, Kerness argues that the array of negative side effects potentially realized by those subjected to this form of treatment far outweighs the benefits afforded to society by isolating individuals convicted of the most serious crimes.  Though she does not directly criticize the practice of enforced isolation, going so far as to cite its religious roots in the Quaker philosophy behind solitary introspection and reform, Kerness seems to find an inexplicable link between solitary confinement and excessive forms of violent, active torture (verbal and physical).  Right or wrong, Kerness’ opinion most certainly lends itself to an interesting discussion of networking in human society, its importance to our everyday survival as a species, and our human right to it.

            While Kerness references the formal introduction of solitary confinement to the United States’ federal justice system as having happened in the early 1800s, I cannot help but think the idea itself was first conceived and practiced many centuries ago, though I admit I have no hard evidence to support this.  Regardless, it is interesting to realize that at some point in time it was decided that one of the worst punishments to inflict upon another human being was to deprive them, through execution or confinement, of the ability to freely communicate and essentially network with other people.  Ultimately, it can be argued that social networking provides a basis for everything we value as humans (love, learning, politics, money, freedom, etc.).  Perhaps our understanding of human nature and the general actions we take as a species can be best achieved by understanding the degree to which networks influence our survival.

Citation

The PDF

Abdulkadiroğlu, Atila. “College Admissions with Affirmative Action.” International Journal of Game Theory; 2005, Vol. 33 Issue 4, p535-549, 15p

The College Admissions game is very similar to the real estate game that we discussed in class. The difference is that in the real estate game, each buyer has a set valuation for every house in the market and the sellers have no preference over buyers other than whether they can give them a high price for the house. As we briefly mentioned in class, games where there are valuations over specific buyers/sellers on both sides get much more complicated. Some real-world examples of these scenarios that Abdulkadiroglu mentions in his article include college admissions, the job market (for certain fields), and even marriage.

Abdulkadiroglu’s objective in this publication is to prove that Affirmative Action (the author denotes as AA) measures are actually beneficial to both students and colleges in the college admissions game. The argument that many have had against AA measures in the past is that it prevents colleges from choosing the most qualified students based solely on academic criteria. Take a simple scenario where there are two females and two males and a college has the capacity for two students. Let’s say that if the college were blind to the gender of these students, they would choose the two females based on credentials. Then, exercising a quota in which the college must choose from a {male, female} set would be unfair to the second-ranked female. Intuitively, this model could be applied to a larger scale and Affirmative Action would be an unfair practice.

This paper proves differently. The heart of Abdulkadiroglu’s argument lies in something called “dominant strategy incentive compatible” (DSIC). This means that revealing one’s true preference is the dominant strategy. The author proves by counterexample that when colleges have substitutable preferences, no stable mechanism is DSIC for every student. In his example, there is one college (out of two) with a substitutable set of preferred students, one of the students (out of three) is accepted by a college when he misrepresents his preferences, and denied by both when he shows his true preferences. This scenario arises when a college equally prefers two sets of students.

In the competitive college admissions game of today, it is very difficult to distinguish students and so the case of substitutable accepted-student sets is a reasonable model. The most competitive colleges are faced with an applicant pool of straight A students all with high SAT scores and ranking these students can, at times, become arbitrary. This is the difference between the real world and the example above where there was a concrete ranking of students. The author implies that many sets of accepted students are equally preferred.

The paper then goes on to demonstrate that when the college’s preferences satisfy AA and RR (a measure of whether or not a student respects the college’s type-specific quotas), the game is DSIC for the students. This means that the students’ best strategy is choosing the true ranking of their preferred colleges. This is a good thing since it complicates the process less. Similar to many of the auctions we saw in class, both parties can choose their true preferences without worrying about anticipating the moves of other players in the game. The true value is the dominant strategy.

This paper is pretty dense in the sense that there is a lot of notation used that we haven’t really learned in class. It is however, very applicable to our own lives 1-4 years ago and very applicable to the job markets many of us will be entering in the future. It is very relevant so I highly recommend that you all take the time to read it. J

Digg: The Most Efficient Way to Waste Your Time

Digg.com is a social bookmarking website that allows users to submit links with a description to a variety of categories. If users like the submission, they can click the “digg” button, or if they dislike it, they can click the “bury” button. The article discusses how Digg.com democratizes the way we get news. The author cites the advantages as “twofold: You have the ability to voice your opinion about what you believe is newsworthy, and every Web site starts on an even keel.”

While I agree that Digg.com may provide opportunities democratic opportunities for users, I believe the links that make it to the front page are shaped by minority of dedicated users. Before a link makes it to the front page, it must go through a process of approval. First, a submitted link is shown in “unsorted” bin of stories—you can see this area by clicking the “Upcoming Stories” link. The most dedicated users live here, “digging” any interesting links. The second level is “Hot in All Topics” area, a limbo between the “unsorted” bin and the front page, where less active users “digg” stories. If the link has enough “diggs”, it will appear on the front page, where the most passive Digg users live. Now we can identify the most powerful users: the users who filter through the “unsorted” bin of stories. These users are the first ones to narrow down the links and control what the majority of people will see and approve. The type people that the article describes—who just want to know what’s “cool”—will be influenced by the few who sift through the hundreds of stories submitted every day.

Looking at Digg.com from a network exchange point of view, the traditional notion of “betweeness” can be used to find the most powerful users. The power structure is similar to a directional graph of conventional hierarchy, but with a twist. The power of the user who submitted the link is dependent on the level below him. While there are increasing amounts of users as we continue down the hierarchy, users individual power actually decreases because a link will accumulate many “diggs”, and an individual who “buries” a link will not have much effect. The collective power of users, however, increases as we go down the hierarchy. If they all “bury” a link, it may disappear for good. But there might be psychological barriers preventing users from “burying” an article because they expect think their vote will not make the difference. In the end, who does have the most power? Again, it is those users right below the original link submitter. These users have a large “betweeness” value and are at the beginning of a directional graph. These powerful users control the flow of information to everybody else.

We often assume that having many choices is a good thing, and this has been reflected in several settings we have looked at in class: if you are selling your house or auctioning an item, you do better if you have many potential buyers than if you have few; if you are negotiating on how to split up $1, you have more negotiating power if you have many choices of negotiating partners (or more precisely, if you have many possible partners who themselves have few choices). Conversely, buyers or negotiators with fewer options end up paying closer to their IPVs for goods or getting the short end of the bargain in negotiations.

However, at times having too many choices can be a bad thing. There are many interpretations of this statement. One of them applies to too many choices for individuals having a negative effect on a population as a whole. We have seen this in Braess’ paradox in the context of traffic networks, where drivers are actually better off if they either have fewer choices or if we tell them what to do (and enforce it with laws or tolls) than if we give them an extra choice of a road.

Another implication is that individuals having too many choices leads to many individuals ‘choosing not to choose’. This is the topic of research of covered in the APA article “Too many choices?” by Tori DeAngelis. The researchers examine the psychological factors of making consumer choices, and find that having too many options often leads people to refrain from buying altogether. Although this work emphasizes the role of psychology in this type of indecisiveness, the principle seems to be more general than that. Whenever one has choice, one also has the pressure of making the right choice. It’s the old addage of the hungry donkey who, stuck equidistant between two bales of hay, cannot make up his mind which way to go and so starves.

In the general case, the “too much choice is a bad thing” phenomenon at least implies that well-connected nodes in a network may sometimes have a harder time than not-so-well connected ones. Internet servers which have relatively many connections have to process more information–all the possible paths through the network–before they can determine the shortest path to a given destination. Thus even if a well-connected internet node has more choices for which way to send data, it suffers from having to work harder before it can make use of that advantage–a server that has only one external link has less choice, but can avoid worrying about finding the optimal path.

“Managing the strengths of ties for internationalization: lessons from four rapidly internationalized Chinese SMEs”, September 2006, Journal of Asia Business Studies
http://wf2dnvr3.webfeat.org:80/

This article examines the internationalization efforts of SMEs (”small and medium enterprises”, or small businesses) in China. Previous research in this field has focused only on the internationalization of large businesses, viewing SMEs as being disadvantaged in global expansion. Moreover, research on business network ties in China has been focused only on strong or ethnic-oriented ties. This article shows that contrary to these assumptions, Chinese SMEs have actively and successfully used weak-tie networks to expand internationally at a rapid pace.

On a national level, Chinese businesses have traditionally relied on strong-tie networks such as social and personal connections to make up for the lack of an established economic business structure. These strong-tie relationships allow business to have higher flexibility and lower costs in their activities because these interactions are based on trust. However, as China has recently been moving into the global market, its businesses have been forced to rethink their reliance on strong-tie networks. Many Chinese entrepreneurs are “self-made men” with “limited global exposure”, their strong-tie relationships are often with others similar to themselves. Thus, while strong-tie networks provide “high quality and dependable” information, they do not provide the “diversity of information” that weak ties would provide; this variety of information is crucial to having a “competitive advantage in [the] global market”. In interviews with the managers of four Chinese SMEs, it was revealed that using weak ties was what allowed these firms to begin establishing themselves in other countries such as the United Kingdom.

The idea of the global expansion of Chinese SMEs using weak-tie relationships is supported in “The Strength of Weak Ties”. On page 1366, Granovetter writes that “whatever is to be diffused can reach a larger number of people, and traverse greater social distance… when passed through weak ties rather than strong”. When a business is attempting to expand on an international rather than a national scale, it is evident that weak ties can in fact be more useful than strong ties. It is also interesting to note that weak ties can play an important role in interracial exchanges as well. This finding is supported in the Milgram “small-world” study mentioned in Granovetter’s article: here, completion of the network chain was almost twice as high when participants used interracial weak ties, “acquaintances”, rather than interracial strong ties, “friends”.

This article offers interesting insights on weak-tie networks in both a business and interracial context. As business development moves to a global level, this will clearly be a topic that is extremely relevant in our society today.

There have been many discussions in INFO204 lectures related to measuring the relative connectedness of individuals in a social network. Most of these have been in an employment context; e.g., the increased importance of a person who connects two different workgroups together, or the fragmentation of a group due to the presence of two powerful, polarizing individuals. However, medical studies argue that there are even more important reasons to be a well-connected node in the local social scene - or, more interestingly - to think that you are one.

In past research, correlations between social isolation and increased risk of death in heart patients have been documented, as well as between social isolation and Alzheimer’s. Now, a new study has found that elderly people who feel socially isolated have twice the risk of developing Alzheimer’s disease of their less-lonely peers. The four-year experiment focused on 823 individuals with an average age of 80.7, comparing their self-reported “loneliness scores” with test results used to diagnose dementia and Alzheimer’s. Even when the actual social connections and interpersonal interaction of the individuals were accounted for, those who reported feeling lonely and isolated were still much more likely to develop the disease, regardless of how well-connected they actually were. It will be interesting to see how well these new findings apply to other areas. Perhaps, like a social-network placebo effect, it’s more important to believe you have lots of connections than to actually have them?

http://www.theaustralian.news.com.au/story/0,20867,21264673-7582,00.html 

 In the upcoming weeks, The Australian Communication and Media Authority must decide how to auction the spectra for two new television channels (we call them A and B). The two methods being considered are an open outcry ascending auction and a sealed-bid auction. In the past, similar auctions (for FM radio licenses, for example) have used the open outcry method with reasonable success, but a strong faction has begun to support the sealed-bid method. Most believe that one company should not control both new channels, and an open outcry auction more easily allows wealthy and powerful companies to dominate their opposition. On the other hand, in a sealed-bid auction, a bidder is more likely to bid his true value for an object, so the auction winner will be the company who values the channel higher, rather than the company who is able to outmuscle its competitors. A sealed-bid auction also prohibits one bidder from observing the bids of other bidders and acting accordingly.

In class, in discussing different types of auctions it was shown that an ascending bid auction is equivalent to a second price sealed-bid auction. Although in the article it is not specified whether the sealed-bid procedure being discussed is a second price or first price auction, the dominant strategy in a second price sealed-bid auction is for every bidder to bid his true value of the object. It was also shown that bidding one’s true value is the dominant strategy in an open outcry ascending auction because if one stops bidding before the price has reached his value, he may not receive a potential positive payoff. The logical question that ensues is that if one’s dominant strategy is to bid his value in each of these types of auctions, why is there even a debate about which auction to use? The answer is suggested in the article and relates to the fact that bidders in the television channel auction may not bid their true value in an open outcry auction, because they may be willing to overbid in order to control both new channels and create a form of monopoly. Using the sealed-bid auction eliminates this problem.