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Seminars

Positive Externalities, Negative Externalities, and Optimal Scale

Date: 09-11-2007
Start Time: 1:00pm
End Time: 2:00pm
Speaker: Ramesh Johari, Stanford University
Location: Uris 333

ABSTRACT

We study a system where many identical customers use a single service. Each customer experiences both positive externalities (a positive "network effect") and negative externalities (a "congestion effect") from other customers using the service. Such a model arises frequently in practice: Application services on wireless networks, peer-to-peer networks, and social networks are examples.

We characterize the social optimum, where a social planner determines the usage level of each customer. We also characterize the Nash equilibrium achieved when the usage levels are determined by the customers themselves, in their self-interest. We study the ratio of the welfare in Nash equilibrium to that in the social optimum.

We demonstrate that there is an *optimal scale*, i.e., a number of customers at which this ratio is maximized; further, the optimal ratio is unity. We also show that this same optimal scale maximizes the Nash welfare of a single individual. We interpret our results in terms of club formation, and study the size of the club as the impact of the positive externality grows.

This is joint work with Sunil Kumar, Stanford GSB.

BIO

Ramesh Johari is an Assistant Professor at Stanford University, with a full-time appointment in the Department of Management Science and Engineering (MS&E), and courtesy appointments in the Departments of Computer Science (CS) and Electrical Engineering (EE). He is a member of the Operations Research group in MS&E, and the Information Systems Laboratory in EE. He is also a member of the advisory board of the Stanford Clean Slate Internet Program. He received an A.B. in Mathematics from Harvard (1998), a Certificate of Advanced Study in Mathematics from Cambridge (1999), and a Ph.D. in Electrical Engineering and Computer Science from MIT (2004).

He is the recipient of a British Marshall Scholarship (1998), First Place in the INFORMS George E. Nicholson Student Paper Competition (2003), the George M. Sprowls Award for the best doctoral thesis in computer science at MIT (2004), Honorable Mention for the ACM Doctoral Dissertation Award (2004), the MS&E Graduate Teaching Award (2005), the INFORMS Telecommunications Section Doctoral Dissertation Award (2006), and the NSF CAREER Award (2007). He has served on the program committees of IEEE Infocom (2007, 2008), ACM SIGCOMM (2006), ACM SIGMETRICS (2008), and ACM EC (2007).