The size of the critical mass as a function of the strength of network externalities: a mobile telephone estimation

Abstract

The amount of financial incentives required to stimulate network growth depends on the size of the critical mass which, in its turn, depends on the intensity with which network externalities play their role in the diffusion process. The measurement of the strength of network effects and all that can enforce or depress them is fundamental for forecasting the diffusion of new goods. Looking at the mobile telephone network for the OECD countries surveyed between 1989 and 2006, we propose a new methodology which allows us to estimate the size of the critical mass through the estimation of the parameters which determines the concavity degree of the inverse demand curve for mobiles. We found that socio-demographic variables, as well as variables which proxy the efficiency of fixed-line operators or the availability and cost of alternative services, affect the strength of network effects and, therefore, the critical mass size.