Search and the Strategic Formation of Large Networks : When and Why do We See Power Laws and Small Worlds ?

Network structures play a central role in determining outcomes in many important situations. Examples include the world wide web, joint research venture projects among firms, co-author relationships among academics, political alliances, trade networks, the organization of intra-firm management, social networks for transmitting information, and P2P systems for file sharing. Given the large and increasing prevalence of such applications, it is necessary to understand the properties of these networks as these have implications for both individual incentives and collective welfare. Previous research has identified several empirical regularities shared by networks in many of these diverse applications. We concentrate on three reasonably robust and prominent empirical characteristics of large networks that have been observed in a variety of settings.

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