Introduction: Issues in Network Economics

Abstract

Networks play an increasingly important role in the world economy. Some markets exhibit positive network effects in which the value of a good or service increases with the number of consumers. These include telecommunications, video formats such as Blu-ray, many computer software packages, and online social networks like eHarmony and Facebook. There can also be negative effects, which are present when an increase in the number of users makes the good or service less valuable. This is especially common in the transportation sector of the economy, where congestion can be a problem. Markets with network effects pose difficult policy questions. When strong positive network effects are present, no more than a few firms will exist in the long run, and surviving firms are likely to have market power. Although the market will be statically inefficient, consumer value rises when each supplier serves a greater number of consumers. In addition, firms in emerging markets with rapid technological change, such as broadband service providers, must invest heavily in research and development in order to remain viable. In this setting, dynamic efficiency may be better served with just one or a few firms. The articles in this series address fundamental theoretical and policy issues that are related to network economics. The first paper by Oz Shy contains a survey of both the theoretical and empirical literature that is related to network economics. The literature in this area is both broad and deep. Shy focuses his discussion on the influence of network effects on consumer demand, competition, technological progress, and intellectual property. He also discusses issues related to social networking and eco-