Effects Of Network Externalities Research Articles

A Field Study on Matching with Network Externalities

We study the effects of network externalities within a protocol for matching faculty to offices in a new building. Using web and survey data on faculty's attributes and choices, we identify the different layers of the social network: institutional affiliation, coauthorships, and friendships. We quantify the effects of network externalities on choices and outcomes, disentangle the layers of the networks, and quantify their relative influence. Finally, we assess the protocol used from a welfare perspective. Our study suggests the importance and feasibility of accounting for network externalities in assignment problems and evaluates techniques that can be employed to this end. (JEL C78, C93, D62, D85, Z13)

Sequential technology implementation, network externalities, and risk: the case of automatic milking systems

AbstractUsing random effects and mixed effects probit regression techniques, this empirical study investigates factors for technology adoption at the firm level. We account for problems of sequential technology implementation and behavior identification. Results underscore the importance of risks faced by the agents, the effects of network externalities and peer‐group learning, and the positive influence of previous firm‐specific innovation experiences.

A study of software product sampling

Product sampling is an important marketing strategy in the software industry. In this work, we propose a dynamic model to study consumer behaviour in software product sampling. The model shows that the demand for dynamic sample is in two equilibrium states. The result of the comparative static analysis indicates that factors such as sampling effectiveness and network externality effect can result in converting samplers into software buyers. Other factors, however, have the opposite impact. These factors include attrition (forgetting) rate, software price, and learning cost. Managerial implications of our findings are provided to the software vendors. We recommend that the software vendor should design an effective and user-friendly sampling mechanism and provide good learning tutorials, courses and demos for the samplers. The software vendor can increase the network effect of software product sampling through increasing of sampler base and knowledge sharing with social media. The vendor should carefully plan the pricing policy so that the effective sampling and maximum total revenue can be achieved.

Investigating the effect of node heterogeneity and network externality on security adoption

Network (positive) externality describes the phenomenon that when people align their behaviors with others, they can incur an explicit benefit [2]. A good example of network externality is the adoption of new technologies. For example, when companies introduce smartphone to the market, the benefit of smartphone to people is determined by how many people are using it. Network externality has been extensively studied. However, many previous results, e.g., [2] only focus on the impact of population size on network externality and only capture the influence of population size on people’s willingness to adopt to a new technology. They did not consider the effect of heterogeneity, for example, different people can cast different influence on others and also different people can be influenced differently. In [3], the authors consider the influence of network externality on security measures deployment. We further enhance and generalize the work by considering the impact of node heterogeneity and differentiation.

An empirical study on the hysteresis of currency substitution in Cambodia

This paper examines whether the currency substitution (CS) phenomenon in Cambodia is in a hysteresis state. We employ a simple model of money-in-the-utility function with two currencies (home and foreign), in which the effect of network externalities on the use of foreign currency is taken into account. The equation derived from the model is estimated using the autoregressive distributed lag approach to cointegration for the period from June 1993 to June 2009. Our estimation results indicate that (1) there exists a stable, long-run relationship among the variables considered, (2) the CS ratio increases when people expect a higher rate of depreciation in the exchange rate, and most importantly, (3) there is evidence supporting the existence of a network externality, thereby implying the hysteresis of the CS phenomenon in Cambodia. Given the characteristics of the CS process in Cambodia, any measure or policy option to bring down the CS degree must be carefully considered.

Market structure and information in payment card markets

This paper investigates the structure of the payment card market, with consumers and merchants basing their subscription decisions on different information sets. We find that the market structure depends crucially on the information set on which consumers and merchants base their subscription decisions. In the studied case, we observe that a market with few cards dominating only emerges when decisions are based on very limited information. Under the same conditions using a complete information set, all cards survive in the long run. The use of an agent-based model, focusing on the interactions between merchants and consumers, as a basis for subscription decisions allows us to investigate the dynamics of the market and the effect of the indirect network externalities rather than investigating only equilibrium outcomes.

Coopetition Strategy – When is it Successful? Empirical Evidence on Innovation and Market Performance

Coopetition (collaboration between competing firms) has been viewed as a potentially beneficial but also a risky relationship for a firm. Earlier literature provides inconclusive evidence in terms of the effects of a firm's coopetition strategy on innovation and market performance, suggesting both positive and negative implications. Some of this variation could be attributed to the fact that coopetition is successful only in certain types of business environment. In order to take the research further, this study examines the effect of a coopetition strategy on the firm's innovation and market performance, focusing on the moderating effects of market uncertainty, network externalities and competitive intensity. The results from a cross‐industry survey of 209 Finnish firms provide novel evidence on the conditions under which coopetition is successful and when it is not.

Option Pricing and Hedging under Stochastic Verhulst-Gompertz Equation

Emphasis is placed on the valuation of plain vanilla option when the price process of underlying asset is described by the stochastic Verhulst-Gompertz Equation with network externality effects in a complete market. The method is based on the change of measure, Girsanov theorem and martingale valuation techinique. The application to an exchange option is made attempt and the valuation formula for this option like the Black-Scholes one is derived. A simple relationship similar to the put-call-parity between the exchange call option and the put option is provided. Our results will be useful to analyze and to hedge the price evolution at a sudden rise or crash of stock and commodity markets. 1 Introduction. The prices of some assets traded in the financial market have the ten- dency raised more when the prices begin to rise, it is because most traders expect that a price rises more and the purchase orders of other traders are induced as a result. Conversely, when the prices begin to fall, selling orders of other traders are induced. In the actual mar- ket, we often observe such a phenomenon called network externality price effects. These effects have been recognized as very significant concept in the field of marketing. Nerlove and Arrow(8) , Bass(2), Vidale and Wolfe(11) and Gould(4) made use of this deterministic version to study the dynamic behavior of new product and advertising policy. Their models were stimulated by a classical theory of logistic curve by Verhulst(10). Gompertz extended Verhulst's model to so-called a deterministic Verhulst-Gompertz model in order to investi- gate the growth of population. In the fields of finance, Schwartz(9) gave a stochastic version of Verhulst-Gompertz model and developed the random behavior of commodity price. His model was based on the biological problem studied by Goel and Richer-Dyn(3). The main purpose of this paper is devoted to describe the network externality effects by a generalized stochastic Verhulst-Gompertz equation and to derive pricing formulae for a plain vanilla and an exchange options when the price of underlying asset shows the network externality price effects. The organization of this paper is as follows. The next section briefly introduces the generalized stochastic Verhulst-Gompertz equation to express the network externality effects and in Section 3 we develope the martingale measure to evaluate the value of option. In Section 4 we derive a hedging strategy and a pricing formula of an exchange option that gives the holder the right which exchanges the underlying asset with the stochastic Verhulst-Gompertz equation for the asset with the geometric Brownian motion (Black-Scholes model) by means of martingale pricing method(7). If we regard the former as the spot price of energy commodity and the latter as the stock price of business firm that trades the energy commodity, such an exchang option will be very useful to hedge the sudden rise or heavy fall in price of energy and make a contribution to the stabilized price of energy. The paper concludes with a brief summary.

Network Stability, Network Externalities and Technology Adoption

This paper investigates how the destabilizing of a social network may increase the scope of network externalities, using data on sales of a video-calling system made to an investment bank's employees and subsequent usage by these customers. The terrorist attacks of 2001 led potential customers in New York to start communicating with a new and less predictable set of people when their work teams were reorganized as a result of the physical displacement that resulted from the attacks. This did not happen in other comparable cities. These destabilized communication patterns were associated with potential adopters in New York being more likely to take into account a wider spectrum of the user base when deciding whether to adopt relative to those in other cities. Empirical analysis suggests that the aggregate effect of network externalities on adoption was doubled by this instability.

Renewable Energy Technology—Is It a Manufactured Technology or an Information Technology?

Socio-technical or strategic approach to renewable energy deployment all suggests that the uptake of renewable energy technology such as solar photovoltaic is as much a social issue as a technical issue. Among social issues, one most direct and immediate component is the cost of the renewable energy technology. Because renewable electricity provides no new functionality—a clean electron does the same work as a dirty electron does—but is relatively expensive compared with fossil fuel based electricity, there is currently an under-supply of renewable electricity. Policy instruments based on economics approaches are therefore developed to encourage the production and consumption of renewable electricity, aiming to remediate the market inefficiencies that stem from the failure in internalizing the environmental or social costs of fossil fuels. In this vein, the most discussed instruments are renewable portfolio standard or quota based system and the general category of feed-in tariff. Feed-in tariff is to support output or generation of the renewable electricity by subsidizing revenues. The existing discussions have all concerned about the relative effectiveness of these two instruments in terms of cost, prices and implementation efficiency. This paper attempts a different basis of evaluation of these two instruments in terms of cost and (network) externality effects. The cost effect is driven by deploying the renewable as a manufactured technology, and the network externality effect is driven by deploying the renewable as an information technology. The deployment instruments are studied in terms of how these two effects are leveraged in the deployment process. Our formulation lends itself to evolutionary policy interpretation. Future research directions associated with this new energy policy framework is then suggested.

Commentary on Jacob Goldenberg, Barak Libai and Eitan Muller's “The chilling effects of network externalities”

This commentary builds on the paper by Goldenberg, Libai, and Muller (2009) and on the areas of the contribution it makes to the field: the distinction between word-of-mouth and network externality effects, agent-based simulations and extensions of the Bass model for aggregate models including word-of-mouth and network externalities. It reflects on some of the issues raised by this paper and provides directions which the author thinks would be beneficial for future diffusion modeling efforts.

Network effects: Do they warm or chill a budding product?

Goldenberg, Libai, and Muller (2010) argue that network effects may slow the takeoff and growth in sales of a new product as adopters wait for sufficient others (threshold) to adopt. They call this the chilling effects of network externalities. They carry out a cellular automata experiment to examine how changes in certain parameter values affect profits due to this effect. They also adapt the Bass model to compute the chilling effect in five markets. Goldenberg et al. (2010) have produced a fine piece of research on the role of network effects in new product growth. Their adaptation of the Bass model is clever and their results appealing. However, their works seem to echo a persistent theme in the economics literature, that network effects have negative effects that can lead to inefficient and perverse markets (e.g., Church & Gandal, 1993; Farrell & Saloner, 1986; Katz & Shapiro, 1986, 1992). With due respect to their rigorous analysis, our research seems to suggest just the opposite — that network effects enhance the efficiency of markets (Tellis, Yin, & Niraj, 2009a,b). To show this effect, I will point to two issues, omitted variables and an enhanced perspective of network effects.

Network externalities—Not cool?: A comment on “The chilling effects of network externalities”

Network externalities—Not cool?: A comment on “The chilling effects of network externalities”

The chilling effects of network externalities: Perspectives and conclusions

The chilling effects of network externalities: Perspectives and conclusions

The chilling effects of network externalities

Conventional wisdom suggests that network effects should drive faster market growth due to the bandwagon effect. However, as we show, network externalities may also create an initial slowdown effect on growth because potential customers wait for early adopters, who provide them with more utility, before they adopt. In this study, we explore the financial implications of network externalities by taking the entire network process into account. Using an agent-based as well as an aggregate-level model, and separating network effects from word of mouth, we find that network externalities have a substantial chilling effect on the net present value associated with new products. This effect may occur not only in a competitive framework, such as a competing standards scenario, but also in the absence of competition. Drawing on the collective action literature in order to relate network effects to individual consumer threshold levels, we find that the chilling effect is stronger with a small variability in the threshold distribution, and is especially affected by the process early on in the product life cycle. We also find a “hockey stick” growth pattern by empirically examining the growth of fax machines, CB radios, CD players, DVD players, and cellular services.

An Economic Analysis of Homepage Creators

This paper considers the behaviors of homepage creators who supply as well as demand content on the Internet while facing content competition. The Internet makes possible an aspect we have not experienced with communication tools as telephone, radio, and TV. We present three propositions. The first is a condition for maximizing the social welfare, in which effects of viewer's externalities must be equal to its competitive effects. The second concerns the effect of network externalities when various sized asymmetric groups interconnect their networks, and the conditions under which one group benefits more than the others is dependent on the increasing or decreasing return to network size. The third states a condition that the amount of content under network externalities is socially insufficient. We finally indicate, by use of an example, the increasing return to network size in the Internet and the decreasing one in the telephone network, noting that the amount of content is socially insufficient on the Internet.

A Field Study on Matching with Network Externalities

We study the effects of network externalities on a unique matching protocol for faculty in a large U.S. professional school to offices in a new building. We collected institutional, web, and survey data on faculty's attributes and choices. We first identify the different layers of the social network: institutional affiliation, coauthorships, and friendships. We demonstrate and quantify the effects of network externalities on choices and outcomes. Furthermore, we disentangle the different layers of the social network and quantify their relative impact. Finally, we assess the matching protocol from a welfare perspective. Our study suggests the importance and feasibility of accounting for network externalities in general assignment problems and evaluates a set of techniques that can be employed to this end.

Location selection of BPO vendors based on a game theory model

Based on two-stage location selection model, taking into account of network externality and brand loyalty effect in the competitive market, this paper establishes a investment location selection model for vendors of Business Process Outsourcing (BPO). Enterprises providing BPO service, elements affecting its selection of investment location, and city competition strategies are analyzed. We discovered that by employing the strategies of differential development, strengthening network externality effect, and increasing market share in the early stage, price competition can be reduced, and the development of BPO industry can be guided into a virtuous cycle.

Policies and international trade agreements on technical compatibility for industries with network externalities

The paper considers a country (home) in which consumers have heterogeneous preferences over ex ante incompatible domestic and imported products and benefit from a network externality. We analyze the cases with trade under perfect competition and the international duopoly, in which both governments strategically use policies toward compatibility but cannot use conventional trade policies. In both cases, the equilibrium outcome of the non-cooperative game depends upon the strength of the network externality effect and involves either an excessively high equilibrium level of compatibility (in combination with either too much or too little trade) or very low equilibrium levels of both compatibility and trade. The paper concludes with the analysis of the international agreements on policies toward compatibility and evaluates the existing provisions in the WTO legal system aimed at minimizing the trade-inhibiting impact of standards and regulations in the area of technical compatibility.

Extending the technology acceptance model to mobile telecommunication innovation: The existence of network externalities

Abstract Consumer acceptance of technological innovations is crucial to marketing new products. According to the most influential model in this area, the Technology Acceptance Model (TAM), perceived usefulness (PU) and perceived ease of use (PEOU) determine users' behavioural intentions to use or purchase a system or product. In the specific context of network externalities, a sense of utility that arises from the number of users (NOU) is considered as important as technology‐specific valuation. This study conducted an empirical survey to examine the effects of TAM and network externalities on the acceptance of Multimedia Messaging Services (MMS), an innovation in the field of mobile telecommunications. The results confirm the effectiveness of the TAM and find that network externalities effect affects users' acceptance to this mobile innovations. Accordingly, the TAM can be applied to predict consumer's acceptance to the mobile telecommunication innovations in the presence of network externalities. Copyright © 2008 John Wiley & Sons, Ltd.