Simulating the Evolution of Market Shares: The Effects of Customer Learning and Local Network Externalities

Abstract

This paper develops a simulation model to investigate competitive technology diffusion, and focuses on examining the influence of customer learning on the evolution of market share when both technologies exhibit local network externalities. Results show that: (1) the equilibrium market share of the new technology is determined by two key factors: the characteristics of customer learning behavior and the strength of local network externalities; (2) moderate network externalities can be beneficial for new technology to dominate the entire market when customers adopt belief-based learning rule; (3) moderate learning rate would facilitate the diffusion of new technology when customers make their decisions based on reinforcement learning; (4) the decay of customer learning and the proportions of imitators in market would help the old technology establish advantage by maintaining demand inertia of customer. The joint effects of psychology of customer behavior and local interactions of customers offer a new mechanism to explain the diffusion of technology in a competitive market with network externalities.