Intensity Of Network Effects Research Articles

Utility Tokens, Network Effects, and Pricing Power

We examine digital product markets in which consumers are heterogeneous in their propensity to actively interact with other users and valuations increase with the share of active users (e.g., social network platforms). We propose a model in which entrepreneurs can issue digital claims (tokens) to promise exclusive access to benefits that specifically enhance the utility of active users. This allows entrepreneurs to extract consumer surplus through price discrimination. Because there is an incentive to renege on the “exclusivity” promise ex post and expand the network of active users, the credibility of this commitment resides in a costly technology (blockchain) that embeds automatic contracts in the tokens sold and limits entrepreneurial discretion. We show that the profitability of token-based sales increases with entrepreneurial ability and the intensity of network effects. This paper was accepted by Will Cong, Special Section of Management Science: Blockchains and Crypto Economics. Supplemental Material: The internet appendix and data are available at https://doi.org/10.1287/mnsc.2023.4917 .

Pricing strategies for information products with network effects and complementary services in a duopolistic market

In this paper, we model a fully covered duopoly market in which two firms offer a differentiated information product that exhibits positive network effects and a complementary premium service to consumers. For each firm, there are two marketing strategies: the freemium strategy and the bundling strategy. We find that, under the market equilibrium, a firms’ decision whether to employ the freemium strategy or not depends largely on the quality of the information product compared to its rival. When the information product quality is similar and the products’ intrinsic values are sufficiently large, both firms will be better off by adopting the freemium strategy, while the bundling strategy will prevail if the products’ intrinsic values are sufficiently small. Additionally, when the magnitude of complementary effects or network effects exceeds a given threshold, both firms’ profit can be enhanced by an increase in the degree of product complementarity or in the intensity of network effects. We also demonstrate that a firm can benefit from an increasing market size only if the intrinsic value of its information product is sufficiently large. Finally, we extend our model to the uncovered market and derive the equilibrium prices and profits.

Strategic Intellectual Property Sharing: Competition on an Open Technology Platform Under Network Effects

In this paper, we explore the strategic decision of an incumbent to open a proprietary technology platform in order to allow same-side co-opetition in a market characterized by network effects. We propose a novel model that, to the best of our knowledge, is the first attempt to analytically conceptualize in this context the interplay among the degree of same-side platform openness, the absorptive capacity of the entrant, and the intensity of network effects. Our analysis uncovers interesting and non-trivial results. First, when quality is exogenous for the entrant, we find that if the intensity of network effects is very strong then the incumbent prefers to close the technology. Moreover, we discuss various interesting open-platform co-opetition outcomes that arise in parallel with a full market coverage. When the entrant chooses the quality level and the incumbent is strategic in its platform opening decision, we find that intense network effects make new players shun the market so IP-sharing is not possible in equilibrium. When the network effects are of intermediate intensity, the incumbent opens the technology to the entrants who possess a sufficiently high absorptive capacity, calibrating the amount of sharing to the entrant's absorptive capacity level to ensure that the duopoly setting is mutually beneficial. In an extension, we also explore the ability of the incumbent to engineer the strength of network effects in the market. When the incumbent finds it optimal to open its core technology, we observe non-trivial alternating-monotonicity patterns for the intensity of network effects with respect to the entrant's absorptive capacity, revealing complex interplay dynamics between the entrant's cost to join the market and the value of the network to the users. Moreover, we show that a model with exogenous network effects could drastically underestimate the range of entrants' absorptive capacity values for which the incumbent should open its platform. This may lead to sub-optimal blocking of certain firms from the market, causing the incumbent to miss out on valuable co-opetition opportunities.

Platform technologies and network goods: insights on product launch and management

Entrepreneurs of technology platforms and network goods face distinctive challenges in managing customer adoption, and in trading off growth and profitability. The firm has several levers of control including managing product design and the intensity of network effects, managing the timing of product announcement versus actual product release, selecting the target market for initial product launch, and whether to sell a single version or an expanded product line. Product line expansion is especially useful under network effects. A freemium approach can help the firm manage both growth (via the free product) and profitability (via the premium higher-priced version). However, expanding the product line carries substantial fixed costs (e.g., marketing cost, cost of additional plant, managing multiple sets of inventory, increased distribution cost). Firms are deterred from incurring these fixed costs when there is uncertainty about product success. Such uncertainty is particularly relevant for multi-sided networks--where the value from joining one network (e.g., users) depends on the size of the other side (e.g., developers)--because potential participants on each side may be uncertain about participation on the other side. Despite uncertainty, product line expansion can be attractive for both startups and established firms. Established firms face lower uncertainty about developer participation, and should expand when fixed costs of expansion are low (and do so early in the product's life cycle). In contrast, startup firms face greater uncertainty in securing participation from third-party developers, and are more likely to benefit from a "wait and see" or deferred expansion strategy.

Optimal Software Free Trial Strategy: The Impact of Network Externalities and Consumer Uncertainty

Many software firms offer a fully functional version of their products free of charge, for a limited trial time, to ease consumers’ uncertainty about the functionalities of their products and to help the diffusion of their new software. This paper examines the tradeoff between the effects of reduced uncertainty and demand cannibalization, uncovers the condition under which software firms should introduce the time-locked free trial software, and finds the optimal free trial time. As the software firm has the option of providing free trial software with limited trial time with full functionalities or limited functionalities for unlimited time, we develop a unified framework to provide useful guidelines for deciding which free trial strategy is preferred in the presence of network externalities and consumer uncertainty.ow that the time-locked free trial is favorable when the intensity of network effect is modest.

Strategic Investment in Technology Standards

Developing a technology standard requires significant upfront investment. The value of a new technology depends on how it is deployed (whether proprietary use or licensing) and is uncertain at the time of investment. Hence, the rules governing investments in technology development must be conditioned on the eventual deployment strategy (such as through licensing) and the nature of uncertainty. The model developed here considers a single firm that has an initial monopoly over an investment opportunity. By committing the investment, the firm establishes a technology standard that can be licensed to a potential competitor. The competitor can either adopt this standard or develop its own incompatible standard. The model predicts a unique optimal royalty rate that results in a single standard. Surprisingly, if technologies create network effects, the optimal royalty rate may even be lower than the level needed to deter the competitor from developing its own standard. Finally, we solve for the investment threshold as the expected future size of the market where the firm is indifferent between investing immediately and postponing the investment. The investment threshold is found to decline monotonically with both the intensity of network effects and the level of uncertainty.