Network analysis and business networks

Abstract

The most common definition of ‘network’ in the business literature focuses on the ties or relations that one entity has with various other entities, abstracting from the ties among those other entities or with others not directly tied to the business of interest. In contrast, economists use a definition based on graph theory that has proven useful in a wide variety of fields (physics, engineering, sociology, economics, biology, etc). In that tradition, a network is a set of entities and the relations between all elements of the set. A fraction of the business literature applies the techniques based on the graph-theoretic definition of networks, known as social network analysis. This paper discusses some exemplary business network analyses and explains additional insights that could be obtained by applying graph-theoretic approaches. The conclusions drawn from this paper illustrate how the network structure affects the market power of the members, depending on whether the transactor has an alternative. The weak links form bridges to other networks and therefore provide alternatives which can reduce market power. This paper identifies the relevance of social network analysis in the social sciences in order to provide a better understanding of business networks.

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