Network models of innovation and knowledge diffusion*

* Much of the material in this paper arises from the collaborative work done with Nicolas Jonard, and owes much to him. I also acknowledge the very helpful comments of Muge Ozman and encouraging words of Franco Malerba. Much of modern micro-economics is built from the starting point of the perfectly competitive market. In this model there are an infinite number of agents — buyers and sellers, none of whom has the power to influence the price by his actions. The good is well-defined , indeed it is perfectly standardized. And any interactions agents have is mediated by the market. That is, all transactions are anonymous, in the sense that the identities of buyer and seller are unimportant. Effectively, the seller sells " to the market " and the buyer buys " from the market ". This follows from the standardization of the good, and the fact that the market imposes a very strong discipline on prices. Implicit here is one (or both) of two assumptions. Either all agents are identical in every relevant respect, apart, possibly , from the prices they ask or offer; or every agent knows every relevant detail about every other agent. If the former, then obviously my only concern as a buyer is the prices asked by the population of sellers since in every other way they are identical. If the latter, then each seller has a unique good, and again what I am concerned with is the price of it. In either case, we see that prices capture all relevant information and are enough for every agent to make all the decisions he needs to make. It is commonplace to observe that we seldom see a perfectly competitive market. We never see infinite numbers of agents, and obviously someone is able to influence prices, else how would they be set, and how would they change? (See the debate between Kirzner, on this issue.) But that alone does not say that the model is a bad approximation. More important is that while it may be possible in principle for any agent to interact with any other, in fact this is far from the case in practice. Typically any agent only interacts with a very small proportion of the population. The " global market " does not really exist. Interactions tend to be quite localized in many senses. It is also the case, though, that we …