Abstract
We examine the diffusion of the network-based services of two incompatible providers across a population as well as customer churn between the two providers. We show that by introducing a possibility for its clients to interact with each other simultaneously within contoured groups (“local clusters”), providers of smaller-sized networks may compensate for their disadvantage in size. This can be attributed to the fact that simultaneous interaction between several consumers has an amplifying effect on the network externalities. Ultimately, it can help to tackle consumer lock-in and network inertia. Observations in GPS-based games with network effects confirm our results. Where players interact within locally bounded areas and spatial distance is relevant, only the number of users in the same area is important to each player, eliminating the immediate relevance of the total network size.
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