A dynamic game analysis of Internet services with network externalities

Abstract

Internet services, such as review sites, FAQ sites, online auction sites, online flea markets, and social networking services, are essential to our daily lives. Each Internet service aims to promote information exchange among people who share common interests, activities, or goods. Internet service providers aim to have users of their services actively communicate through their services. Without active interaction, the service falls into disuse. In this study, we consider that an Internet service has a network externality as its main feature, and we model user behavior in the Internet service with network externality (ISNE) as a dynamic game. In particular, we model the diffusion process of users of an ISNE as an infinite-horizon extensive-form game of complete information in which: (1) each user can choose whether or not to use the ISNE in her/his turn and (2) the network effect of the ISNE depends on the history of each player’s actions. We then apply Markov perfect equilibrium to analyze how to increase the number of active users. We derive the necessary and sufficient condition under which the state in which every player is an active user is the unique Markov perfect equilibrium outcome. Moreover, we propose an incentive mechanism that enables the number of active users to increase steadily.