Abstract
The literature on network effects has a longstanding controversy regarding the possibility that markets may lock into an inferior technology. This controversy and confusion were triggered by Arthur’s (1989) model of winner-take-all dynamics driven by positive feedback (success begets more success) in markets with competition between incompatible technologies. In reality, however, even when positive feedback is rather apparent, incompatible technologies sometimes persist with no clear-cut winner-take-all outcome. We believe the confusion stems from an implicit assumption in Arthur’s model — the influence of adopters persists indefinitely. We shed new light on this controversy by examining the implications of influence that decays over time. Our model exhibits what physicists call a “critical slowing down.” In the vicinity of a critical influence decay level, our model displays a protracted period of technology competition even in the presence of positive feedback. This protracted process provides the opportunity for the market to redress premature lock-in to an inferior technology.
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