Network Effect Theory Research Articles

Virtual Patent Networks and Their Network Effects

On the basis of the economic theory of network effects, this article provides a novel explanation of the so-called patent paradox, i.e. the question why the propensity to patent is so strong when the expected average value of most patents is low. It demonstrates that the patent system of a country resembles a telephone network or a social media platform. Patents are perceived as nodes in a virtual network that, as a whole, exhibits network effects. It is explained why patents are not independent of other patents but that they complement each other in several ways both within and beyond markets and fields of technology, and that patents thus create synchronization value over and above individual interests of patent holders in exclusivity. As a consequence, the more patents there are, the more valuable it is to also seek patents, and vice versa. Since patents thus display increasing returns to adoption, the willingness to pay for the next patent slopes upwards. This explains why, after a phase of early instability and a certain tipping point, many countries’ patent systems expanded quickly and eventually became a rigid standard (“lock-in”). The concluding section raises the question what regulatory measures are suitable to effectively address the ensuing anticommons effects.

Innovation Diffusion of Mobile Applications in Social Networks: A Multi-Agent System

Mobile application innovation diffusion can be used to enhance the reputation and competitiveness of Internet enterprises. However, few works have explored the process of mobile application innovation diffusion from the individual perspective. Therefore, this paper employs multi-agent methods to simulate the innovation diffusion of mobile applications from the perspective of social networks. Specifically, we combine psychology, sociology, game theory and network effect theory to model user behaviors of adoption and rejection decisions for mobile applications. The multi-agent model was built in Anylogic 8 to simulate the communication and interaction between individual users. Then, this paper discusses the evolution of decision-making of social network user groups with different network structures and network effects. We also investigate the impact of different firms’ promotion on innovation diffusion. Our findings suggest firms could make better strategies and achieve better diffusion effects from mobile applications.

How does customer orientation (in)congruence affect B2B electronic commerce platform firms' performance?

Business-to-business (B2B) electronic platforms have become important channels for transforming traditional modes of transaction. The success of these platforms relies heavily on the platform firms' customer orientation (CO) practices, which are designed to attract both sellers and buyers. This study draws on the cross network effect theory to explore whether and how a B2B e-commerce platform firm's (in)congruent CO strategic initiatives toward sellers or buyers affect the firm's performance. In addition, the moderating effects of seller-side and buyer-side demand uncertainty on the relationship between CO (in)congruence and platform firm performance are investigated. The analysis of data collected from 185 B2B electronic platform firms in China reveals that CO incongruence is more beneficial to firm performance than CO congruence. Furthermore, when seller-side demand uncertainty is high, an increase in seller-focused CO incongruence (i.e., higher seller orientation than buyer orientation) or buyer-focused CO incongruence (i.e., lower seller orientation than buyer orientation) improves or impedes a B2B e-commerce platform firm's performance, respectively. However, when buyer-side demand uncertainty is high, an increase in either type of CO incongruence does not improve firm performance. These findings contribute to the literature on and practices of B2B e-commerce and customer orientation.

What drives self-disclosure in mobile payment applications? The effect of privacy assurance approaches, network externality, and technology complementarity

Purpose Drawing on the control agency theory and the network effect theory, the purpose of this paper is to examine the effect of privacy assurance approaches, network externality and technology complementarity on consumers’ self-disclosure in mobile payment (MP) applications. The authors identify four types of privacy assurance approaches: perceived effectiveness of privacy setting, perceived effectiveness of privacy policy, perceived effectiveness of industry self-regulation and perceived effectiveness of government legislation. The research model considers how these privacy assurance approaches influence privacy concerns and consumers’ self-disclosure in MP applications under boundary conditions of network externality and technology complementarity. Design/methodology/approach An online survey with 647 sample users was conducted to empirically validate the model. The target respondents were current consumers of a popular MP application. The empirical data were analyzed by a structural equation modeling approach. Findings The empirical results reveal several major findings. First, privacy assurance approaches can effectively decrease privacy concerns, which ultimately formulates consumers’ self-disclosure in MP applications. Second, network externality and technology complementarity weaken the effect of perceived effectiveness of privacy setting on privacy concerns. Third, network externality and technology complementarity strengthen the relationship between perceived effectiveness of government legislation and privacy concerns, while they have non-significant interaction effect with perceived effectiveness of privacy policy and industry self-regulation on privacy concerns. Practical implications MP providers and stakeholders can harness the efficacy of privacy assurance approaches in alleviating privacy concerns and promoting consumers’ self-disclosure in MP applications. Originality/value The authors’ work contributes to the information privacy literature by identifying effective privacy assurance approaches in promoting consumers’ self-disclosure in MP applications, and by highlighting boundary conditions of these privacy assurance approaches.

Relation and Network Externality Based on Asymmetric Interest Flow Theory with the Case of Health Damage Caused by PPV’s Energy Consumption

The study starts with a logical reasoning: if the network is composed of individuals and their relations, the network externality should also have a micro foundation. However, the traditional network externality or network effects theory does not indicate the specific meaning of individual nor relation externalities. Therefore, the study first defines the relation and its decisive characteristic: the interaction of interest flow. Furthermore, it is pointed out that the asymmetric interest flow is the essential feature of externality. Then, with the help of flow analysis in graph theory, the mathematical models of potential relation, relation and relation externality are given. Based on the definition of individual externality on the net, a new interpretation of network externality compared with traditional one is given, which is the state set of individual externalities on the net. Finally, we use these definitions to give a new explanation to a specific case in energy and environmental field and supply a new framework to solve general or concrete externality problems.

Winner Takes All? The 'Blockbuster Effect' in Crowdfunding Platforms

Crowdfunding has gained momentum in recent years. Even though an increasing amount of research has been devoted to the economic value of crowdfunding marketplaces, the interactions and effects among crowdfunding have yet to be fully studied. The current study strives to bridge this gap by examining the impacts of projects – i.e., overwhelmingly successful – on the crowdfunding platform. Hypotheses are formulated based on the theory of network effects. Our preliminary results suggest the blockbuster exhibit positive spill-over effects within project category but cannibalization effects across categories. We also find evidence of lasting positive/negative network externality within/across category/categories. Further analysis suggests that fresh backers who are attracted to the platform by the blockbuster tend to be more engaged and more active. Our research aims to extend the emergent crowdfunding literature by examining network externalities among projects. We also provide practical implications for project creators and platform administrators.

Developing a More Robust Approach to Global Supply Chain Information Systems in a Turbulent World

A global supply chain comprises producers, consumers, distributors, and retailers who may span trans-national boundaries. This paper reviews literature on global supply chains and offers recommendations about the key characteristics of a robust global supply chain information system. Issues related to standards diffusion at an international level are also discussed in light of the network effect theory. A review of an automotive supply chain case study (MOSS) has been presented to highlight the new approach to the effective use of inter-organizational information systems (IOS). Emphasis is laid on an industry standards approach that is non-proprietary and increasingly web-based.

Revisiting Network Effects Theory: Towards a Strategy Perspective

Network effects theory has become highly influential, and has been widely used also in management studies to analyze competitive and technology dynamics in markets where innovation is systemic. Applied to multi-sided markets, whereby a platform mediates between users and complementary goods’ producers, network effects theory predicts that the platform that gains an early lead in terms of users installed base will farther reinforce the lead and dominate the market – the so-called winner-takes-all hypothesis. This theoretical logic not only is an extreme simplified representation of reality; but one falsified to some extent by recent empirical studies. We argue that we miss a proper understanding of how platforms achieve and leverage such network effects, and offer a proposed research model towards what might be a strategic perspective on the competitive dynamics of platform ecosystems.

Law's Signal: A Cueing Theory of Law in Market Transition

Securities markets are commonly assumed to spring forth at the intersection of an adequate supply of, and a healthy demand for, investment capital. In recent years, however, seemingly failed market transitions - the failure of new markets to emerge and of existing markets to evolve - have called this assumption into question. From the developed economies of Germany and Japan to the developing countries of central and eastern Europe, securities markets have exhibited some inability to take root. The failure of U.S. securities markets, and particularly the New York Stock Exchange, to make greater use of computerized trading, communications, and processing technologies, meanwhile, seems to suggest market resistance to technological modernization. In light of this pattern, one must wonder: How are strong markets created and maintained, and what might be law's role in this process?This Article attempts to articulate a model for understanding the needs of efficient market transition and the resulting role of in that process. Specifically, it suggests a function for in market transition. Grounded in largely ignored lessons of game theory and microeconomic analysis of so-called network effects, cueing theory identifies the coordination of market participants' expectations as law's central role in market transition. Building on recent legal literature on private regulation, social norms, and the expressive function of law, this theory suggests that in securities market transition - whether it be market creation in central and eastern Europe or market restructuring in the United States - primarily serves to convene, encourage, inform, and facilitate.A cueing role for constitutes an important extension of traditional conceptions of what does, particularly in securities regulation, but in other areas as well. Regulatory cues are neither coercive nor outcome determinative and involve a close intertwining of public and private regulation. The exceptional character of in this context, and the recent growth in areas where regulatory cues might have fruitful application, may explain why such a role has not previously been analyzed. Yet in securities markets and other industries exhibiting network economies - from electricity transmission and interstate transportation to telecommunications and the Internet - a cueing function for may be central to efficient transition. It may explain much of why law matters in the modern economy.

New theories and methods for technology adoption research

This special issue includes six articles on different aspects of technology adoption that represent the development and application of different theoretical and methodological approaches to the business problems that they treat. In terms of theory, three of the articles use behavioral and organizational theories, including adaptive structuration theory, management fashion theory, the unified theory of technology acceptance, the technology acceptance model, and diffusion of innovation theory. The other two are based on economic theory, including network effects theory, and economic growth theory. The methods used are also dramatically different in each of the studies. Three studies use field research and survey methods that are common in organizational and behavioral research designs. The authors of these studies are: Sinclaire and Vogus; Park, Lee and Yi; and Hester. Techatassanasoontorn and Suo’s study, in contrast, uses agent-based computational simulation and network modeling to produce its results. Westland’s article discusses affective information technologies for data acquisition in survey research, and employs a detailed historical overview of the literature, along with survey methods and data analysis to illustrate its application. Finally, the study by Ho, Kauffman and Liang uses panel data econometrics and a variety of refinements that permit the triangulation of evidence based on the assumption of somewhat different modeling relationships. Taken together, the contents reflect some of the current advances that are occurring in the literature with respect to theory and methods for technology adoption research that we hope to showcase in this special issue. The special issue opens with a piece by Jollean Sinclaire and Clinton E. Vogus on ‘‘Adoption of Social Networking Sites: An Exploratory Adaptive Structuration Perspective for Global Organizations.’’ Since social media have become popular with Internet users around the world, global businesses have also recognized their potential importance as a means to be in touch with their customers and the marketplace overall. The theoretical focus of this research involves the dual use of management fashion theory and adaptive structuration theory in order to show the variety of beneficial uses to which organizations are applying social media. Their research is survey-based, and includes interviews with middle to senior managers in a total of 72 large firms that have global operations. In addition to reporting the empirical regularities of social media use, the authors also characterize the different purposes that the organizations have for investing in social media. For example, they report passive versus active applications, proactive versus reactive implementations, and tactical versus strategic uses. The authors also suggest that adaptive structuration theory enables them to interpret the use of social media in global organizations in terms of the low levels of restrictiveness and sophistication, crossed with the open nature of the social media environment on the Internet, to draw conclusions about the basis for further technological innovations with social media, as well as related changes in the way that organizations operate and structure themselves in relation to these technological innovations. Although their study is exploratory and early in its cycle of development, it nevertheless offers a useful perspective on the various issues that can be pursued in follow-on research to gain a fuller understanding of the R. J. Kauffman (&) School of Information Systems, Singapore Management University, 80 Stamford Road, Singapore 198702, Singapore e-mail: rob7585@gmail.com

Sustainable competitive advantage of a system goods innovator in a market with network effects and entry threats

An innovator (a firm) introducing a technology for system goods into a market with network effects can adopt various licensing strategies. The innovator's strategy spectrum could include being a monopolist for an entire system using a proprietary technology, for only a set of components, or for one of the firms in a competitive market by licensing (opening) all of its technology to others firms. Regarding the choice of these strategic options, two conflicting schools of thought have emerged: network effects theory and leverage theory. Although the former encourages the innovator to completely reveal or open its technology in order to benefit from increased compatibility, the latter recommends the innovator to strictly withhold and protect its proprietary technology in order to avoid future competition. A few historical examples, such as the PC platform competition of IBM and Apple, suggest that neither of these extreme measures lead to business success. Therefore, a model has been developed in order to integrate these two perspectives. Our results suggest that while network effects encourage firms to open technology to a limited extent, they should strictly protect their “core” technological competency in order to minimize future competition.

An Exploratory Analysis of the Relationship Between Organizational and Institutional Factors Shaping the Assimilation of Vertical Standards

Vertical standards describe products and services, define data formats and structures, and formalize and encode business processes for specific industries. Vertical standards enable end-to-end computing, provide greater visibility of the organization’s supply chain, and enable transactional efficiencies by automating routine tasks, reducing errors, and formally defining all parameters used to describe a product, service, or transaction. Research on standards diffusion has explored either firm-level and institutional variables, without integration of the two areas. This study develops scales for 11 constructs based on concepts culled from diffusion of innovations theory, organizational learning theories of technology adoption, institutional theory and network effects theory. The scales are validated with data collected from the membership of OASIS, a leading international standards-developing organization for electronic commerce technologies. Using data cluster analysis, relationship patterns between the 11 constructs are investigated. Results show that low fit between vertical standards and existing organizational business processes and data formats, low levels of anticipated benefits, and inadequate momentum with critical business partners contribute to slower vertical standards assimilation. However, organizational involvement with influential standards-development organizations, and the right set of technologies, skills, and structures to readily benefit from vertical standards spur their assimilation.

A Network Perspective of Digital Competition in Online Advertising Industries: A Simulation-Based Approach

Using agent-based simulation experiments, we investigate the outcome of SAs between two smaller online search engine companies in competition with a dominant market leader in settings where an advertiser's decision making is the consequence of a combination of NI (e.g., an individual's willingness to follow others' decisions) and IP. In particular, we focus on a context in which the combined search engine company competes with a market leader holding a larger share of the market than the two runner-up “underdogs” combined. Our results indicate that, with the presence of NI and cascading effects, an alliance with “only” 35%–40% combined market share could compete with a leader whose market share, at the time of an alliance, is 60%–65%. Although important, size alone might be insufficient to build the market as suggested by the “vanilla” network effect theory. Another noteworthy finding is that a nonlinear association exists between NI and an alliance outcome; the combined runner-up companies have the best chance of success when the extent of NI is midrange, rather than on the high or low end of continuum. Contrary to the conventional view, this finding might also stimulate discussions among network science researchers. Furthermore, our results suggest that NI substantially moderates the relationship between the combined market share at the time of an alliance and the likelihood of resulting alliance success.

MICROSOFT AND THE LIMITS OF ANTITRUST

Frank Easterbrook's 1984 article, The Limits of Antitrust, did not focus on public antitrust enforcement. Nevertheless, it expressed the kind of antitrust thinking that led the Antitrust Division of the U.S. Department of Justice, around the same time, to shift its resources to cartel prosecutions and away from big monopolization cases. The Microsoft case, filed in 1998, broke this pattern. I argue that the Division made this exception, and ultimately achieved a partial victory in the courts, because the relatively new economic theory of network effects seemed to make the filters Easterbrook proposed in 1984 less applicable in high technology markets like the ones in which Microsoft competed. In this article, I return to Easterbrook's filters and consider whether they offer a different perspective on the Division's decision to sue and the courts' eventual resolution of the case.

Adoption of electronic medical records: the role of network effects

PurposeThis paper aims to examine the role of network effects (defined as increased utility for users of a technology that occurs when adoption increases among other users) in the adoption of electronic medical records (EMR) systems. EMR systems, which have experienced slow adoption rates, promise to improve the efficiency of the healthcare system by facilitating information exchange among physicians caring for the same patients.Design/methodology/approachSurvey responses from physicians are used to test several hypotheses. The authors are interested in how market level EMR adoption was related to physician adoption intentions. The authors also test the “strong ties” notion of network effects by examining whether EMR adoption among generalists, and specialist physicians, had differing influences on adoption intentions in a given market.FindingsSupport for network effects is found; each one unit increase in market‐level EMR adoption is associated with a significant increase in overall physician adoption intention in that market. Secondary analyses suggest adoption of EMRs by specialists is significantly predictive of generalists' adoption intentions in a given market. However, as predicted, EMR among generalists does not influence other generalists' intentions; nor does EMR adoption by a specialists influence other specialists' intentions.Research implicationsNetwork effects play a role in the EMR adoption among physicians. Decision‐makers wanting to influence adoption should target defined market segments in an effort to build a critical mass of adoption then move to adjacent segments once network effects take hold.Originality/valueThis paper applies network effects theory to help explain the suboptimal adoption rates of an important healthcare technology.

Network effects as drivers of individual technology adoption: Analyzing adoption and diffusion of mobile communication services

Adoption research has largely ignored the dynamic impact of network effects on technology adoption and diffusion. For example, some technologies become more attractive the more social peers use them as well. But adoption at the same time increases the value for the peers and thereby their adoption decisions as well. Unfortunately, interdependencies like these make adoption and diffusion patterns very complex. Drawing on network effect theory, we develop an adoption and diffusion model that explicitly considers the role of direct and indirect network effects for individual technology adoption, using mobile commerce adoption as application example. By applying a simulation approach we can exemplify and analyze the fundamental adoption dynamics given rise to by network effects. We thereby propose a way of how to incorporate network effects into adoption research and disclose the role of the technology diffusion lifecycle for individual adoption.

Market structure of China's network industry

PurposeThis paper aims to study network effects and the impacts on market structure in the specific context of China's network industries.Design/methodology/approachThis paper is organized in the mode of “concept‐model analysis‐empirical examination”. Starting from the concept of “network effect”, it is then extended to the theoretical analysis of market structure and the examination of China's representative network industries.FindingsThe data for China's representative network industries produce mixed findings. Some prove the theoretical estimation quite well, while others do not follow the theoretical conclusion so closely.Research limitations/implicationsThe data for China's network industry are relatively limited. The depth of the data is especially inadequate, which prevents more systematic econometrical analysis.Practical implicationsThe paper can serve as a reference for private decision makers of network industries and for regulators with antitrust concerns.Originality/valueThis paper may be the first of its kind to study the market structure of China's network industries from the perspective of network effects theory. It could be a good reference for those interested in learning the current status of China's network industries.

Network Effects Revisited: The Role of Strong Ties in Technology Selection

This paper extends the theory of network effects by moving beyond the traditional treatment of the installed base of a technology as composed of “N” identical users, each having the same effect on ...

Should Buyers Try to Shape IT Markets Through Non-Market (Collective) Action? Antecedents of a Transaction Cost Theory of Network Effects

This paper develops a transaction cost theoretic model of network effects and applies it to assessing the chances of users to influence the range of technological choices available on IT markets through collective action. The theoretical basis of the model is formulated by a number of empirically refutable propositions which overcome a number of conceptual and empirical difficulties encountered by the traditional interpretation of network effects as (positive) network externalities. The main difference between our model and modeling network effects as network externalities is that network effects are seen as caused by the costs of purchasing/marketing new technology, that is, transaction costs, rather than by the benefits of using new technology. A preliminary application of the model suggests that users can significantly improve the chances of replacing an established technology by a new, potentially superior one if they set up an organizational structure that serves as a conduit of information exchange and knowledge sharing. This, however, would call for a rather different type of collective user action than exists today in the form of user groups.

The Crisis of communication: Videotext, the internet and innovation in France and the United States

This article compares videotext in France and the United States, the two advanced industrialized countries where videotext was the most and least successful, respectively, in order to demonstrate how videotext as a techno-political project foreshadows the explosive growth of the Internet as the dominant global communications platform. It draws upon the theory of network effects, in combination with a comparative analysis of both the institutional settings for research and development and political discourse, to explain how the interaction between state, market, and culture shaped network development and policy outcomes. Data are drawn primarily from official policy documents and trade journals from the era.