Network Externalities Research Articles

Efficiency-Enhancing Horizontal Mergers in Spatial Competition with Network Externalities

We study horizontal mergers in a network products market with a three-firm model of spatial competition, where two merged firms become compatible at the expense of product differentiation. We consider two different approaches to modeling rational expectations: responsive and passive. The results show that the merger may reduce industry competition, since the merger-related compatibility enlarges the network scales for insiders and amplifies product differentiation between the insiders and the outsider; therefore, the proposed merger may benefit all firms, raise consumer surplus, and enhance social welfare, i.e., the merger is Pareto-improving.

CSR investment for a two-sided platform: Network externality and risk aversion

The business of two-sided platforms, such as those used for online ride-sharing, has expanded rapidly thanks to opportunities to efficiently match supply- and demand-side users. However, the development of these platforms faces the challenge of complying with corporate social responsibility (CSR) regulations, particularly on the supply side of two-sided platforms. How to improve CSR investment, in order to reduce CSR violations while ensuring profitability, is now an important question. In this paper, we develop a game-theoretic model for a two-sided platform and analyze the impacts of network externalities (including customer network externality and provider network externality) and risk aversion on CSR investment decision-making. The analytical results show that, contrary to our intuition, greater network externalities do not necessarily stimulate the platform to invest in CSR. When the strength of customer network externality is high, investment in CSR may have a “dilution effect”, i.e., CSR investment may reduce the platform's number of users and profit. Conversely, risk aversion always has an “incentive effect” on CSR investment, thereby increasing the platform's willingness to invest in CSR. Second, both provider and customer network externalities will increase the platform's prices. Interestingly, when the strength of customer network externality is high, the platform attracts more customers, even at high prices. Finally, our analysis indicates that risk aversion may reduce customer surplus when the strength of customer network externality is high. This result contradicts the initial expectation that risk aversion inspires platforms to invest in CSR, thereby improving customer utility and customer surplus.

Platform Encroachment and Own‐Content Bias*

This paper presents a model of platform encroachment, in which a platform not only acts as an intermediary between consumers and third‐party sellers, but also sells its first‐party products. When encroaching, the platform chooses between fair and biased search engines. Under the fair search, all products are equally likely to appear in search results, whereas the first‐party product is more likely to appear under biased search. Biased encroachment makes the platform impose a lower commission on sellers, which leads to a lower equilibrium price which consequently attracts more consumers. Increased consumer participation can raise seller participation through indirect network externalities.

Continued usage of smart wearable devices (SWDs): cross-level analysis of gamification and network externality.

With the increasing maturity of mobile networks and big data technology, smart wearable devices (SWDs) are regarded as a new technology trend following smartphones. Especially during the COVID-19 pandemic, the increase in telework and the growing interest in self-health monitoring have greatly promoted the market growth of SWDs. This study aimed to investigate the factors affecting the continued use of SWDs. A cross-level analysis model that integrates technical characteristics, gamification theory, perceived value theory, and network externality was constructed. A hierarchical linear model was employed to evaluate the data and test it against the hypotheses. The empirical results showed that, at the individual level, gamification enhances users’ value perceptions. Users pay more attention to rewards in gamification than to competition. Rewards were also found to effectively promote the users’ value perception and increase the intention to continue using the device. At the group level, the effect of network externality significantly influences the intention to continue using SWDs. Moreover, SWDs are associated with the phenomenon by which consumers conspicuously display and highlight their own characteristics, and this attribute is also a crucial factor enticing consumers to continue using SWDs. Developers should therefore establish clear product positioning and strengthen interactivity as early as possible to build a loyal customer base.

Research on Price Influencing Factors of Third-Party Payment Platforms: An Empirical Study From China.

In this article, we use the two-sided market theory as a support and take the operating data of eight Chinese third-party payment platform companies as samples, based on pricing models and multiple regression analysis, to build a price feature model for a third-party payment platform. The results show that under the two-sided market environment, the scale of consumer and the same-side network externality of the merchant have a negative significant effect on the pricing of the third-party payment platform to the seller; The market share of the platform and the bank fee cost of the platform have a positive significant effect on the pricing of a third-party payment platform to the merchant. At the same time, the same-side network externality of the seller, the scale of a merchant, and the selection of the business model of the platform have no significant effect on the pricing of the third-party payment platform to the merchant. These conclusions provide a scientific basis for a third-party payment platform enterprise to develop an appropriate pricing strategy and operating model.

The Challenger Victories in The Asymmetric Technology Competition under The Network Externality

In what condition, the challengers of the market would gain the support of the very incumbents they disrupt. This seemingly impossible logic often occurs in reality. By establishing a model of technological competition with asymmetric characteristics under network externalities, we provide a correlation possibility to serve as a warning for incumbent enterprises. We find that under the joint influence of technological competition and network externalities, a dangerous area would be created. In which, the network externality would paralyze the judgment of the enterprise on the profit and lead to the wrong decision of the enterprise in the face of technology competition. Moreover, this paper believes that, enterprises should focus on the changes in the overall value of the market due to the introduction of technology, rather than making the related decisions based on their own profit demand. Our research has contributed to the studies of both the interpretation of the innovator's dilemma and the direction of risk research considering network externalities.

Post-IPO VC Ownership Effect on Innovation-Enhancing Investment of Newly Public Firms

Although the existing literature has discussed the effects of VC firms on investee ventures before and at the time of an IPO, less is known about how they influence the strategic decisions of newly public firms after the IPO. Conventional wisdom is that VC investors exit from a venture investment through an IPO. However, we find that VC investors hold a significant amount of shares for years after an IPO. This study examines how VC investors affect a firm after an IPO. Building on the literature on governance through ownership, we argue that post-IPO VC shareholders encourage innovation-enhancing investments of newly public firms and that post-IPO VC ownership positively affects the market value of newly public firms. Our underlying logic is that outcomes created by innovation-enhancing investments of newly public firms can be beneficial to not only themselves but also VC shareholders for VC reputation, network externality, and knowledge acquisition. Consistent with our arguments, our empirical study shows that post-IPO VC ownership is positively related to R&D intensity, CAPEX investment, and Tobin’s Q of newly public firms and that these relationships are amplified when a lead VC is located close to the firm, when a VC investor sits on the board, and when investees are in technology-intensive industries. This study expands the scope of the VC effect on investee ventures beyond an IPO.

Does Distance Determine the Location Choice of I-business Firms?

This study examines the role of cross-national distance on the location choice of I-business firms in their international expansion. While technology enables faster international expansion of I-business firms, unfamiliarity with and uncertainty of distant host countries may still affect their location choice. We examine the impact of cross-national distances based on CAGE framework (i.e., cultural, administrative, geographic and economic) on the location choice of I-business firms. We further identify two firm-level contingencies of I-business firms (i.e., direct network externalities and engagement in business-to-business transactions) that condition the effect of cross-national distances on the location choice decision. Using a global data set of 185 I-business firms, we find that cultural, administrative and geographic distances negatively impact the location choice. While I-business firms with direct externality strengthen the negative relationship between distance and location choice, business-to-business (B2B) firms weaken them. Our study demonstrates the continuing role of distances on the internationalization of I-business firms.

What influences users’ continuance intention of internet wealth management services? A perspective from network externalities and herding

In recent years, more and more wealth management platforms have adopted Internet wealth management (IWM) services to attract users. Due to the intensive competition and low switching costs, it is essential for platforms to enhance users’ willingness to continue using IWM services. Comprehensively considering the role of network externalities and herding, this study identified the factors affecting users’ continuous intention of IWM service. The research model was tested using survey data collected from 637 respondents concerning their perceptions of IWM services. The results indicate that network externalities (network size, perceived complementarity, network strength) have significant impact on herding and perceived value, thus affecting continuance intention. Furthermore, herding and perceived value have a greater impact on continuance intention of users with low financial literacy than that of users with high financial literacy. This study could benefit wealth management platforms and researchers seeking to improve the retention rates of IWM users.

Social media networks, fake news, and polarization

We study how the structure of social media networks and the presence of fake news affects the degree of misinformation and polarization in a society. For that, we analyze a dynamic model of opinion exchange in which individuals have imperfect information about the true state of the world and exhibit bounded rationality. Key to the analysis is the presence of internet bots: agents in the network that spread fake news (e.g., a constant flow of biased information). We characterize how agents’ opinions evolve over time and evaluate the determinants of long-run misinformation and polarization in the network. To that end, we construct a synthetic network calibrated to Twitter and simulate the information exchange process over a long horizon to quantify the bots’ ability to spread fake news. A key insight is that significant misinformation and polarization arise in networks in which only 15% of agents believe fake news to be true, indicating that network externality effects are quantitatively important. Higher bot centrality typically increases polarization and lowers misinformation. When one bot is more influential than the other (asymmetric centrality), polarization is reduced but misinformation grows, as opinions become closer the more influential bot’s preferred point. Finally, we show that threshold rules tend to reduce polarization and misinformation. This is because, as long as agents also have access to unbiased sources of information, threshold rules actually limit the influence of bots.

Empirical Analysis of the Impact of Industrial Internet Development Environment on Open Green Innovation of Manufacturing Enterprises

This study aims to expand the research perspective from the micro-enterprise level to the regional environment level to identify changes in the regional industrial Internet environment. The development and application of Industrial Internet technologies formed by these changes have spillover effects on Industrial Internet innovation. Sample data from 30 provinces and big cities of China from 2006 to 2018 were used to verify the network externality characteristics of industrial Internet development. The nonlinear impact of environmental factors, such as the proportion of Internet users and intellectual property protection on the open green innovation of manufacturing enterprises, was investigated through the panel threshold model. Meanwhile, the development level of the industrial Internet in eastern and western China is compared and analyzed. This study contributes to existing knowledge and guides practitioners to help manufacturing organizations develop industrial Internet environments.

Effects of Network Externalities and Recycling Channels on Closed-loop Supply Chain Operation Incorporating Consumers’ Dual Preferences

Consumers’ awareness of environmental protection is gradually strengthened, and they often consider environmental protection characteristics of products during purchasing products. Based on the characteristic of consumers’ dual preferences for product quality and environmental friendliness, this paper constructs a novel closed-loop supply chain with network externalities for new products and remanufactured products under different waste product recycling channel strategies. It discusses the influence of product recycling channel strategies and network externalities on the optimal decision of the company. By establishing the Stackelberg game model, the analysis found that the retail price of new products and remanufactured products is not affected by network externalities and recycling channel strategies, even if the wholesale price of remanufactured products increases with the influence of network externalities. The changing trend of market demand for new products and remanufactured products is different between products with network externalities and without network externalities. When the cost of remanufactured products is within certain range, the existence of network externalities makes the market demand for new products and remanufactured products increase simultaneously. Our study also found that even if products have positive network externalities that increases consumer utility, when the cost of remanufactured products is outside certain range, the company’s profit will be higher when products have no network externalities than that when products have network externalities.

Network externalities, product compatibility and process innovation

ABSTRACT This article augments d’Aspremont and Jacquemin’s [1988. “Cooperative and Noncooperative R&D in Duopoly with Spillovers.” American Economic Review 78: 1133–1137; 1990. “Cooperative and Noncooperative R&D in Duopoly with Spillovers: Erratum.” American Economic Review 80: 641–642] cost-reducing R&D duopoly by introducing network externalities and product compatibility and then considers the investment decision stage. For standard non-network industries, the received literature has robustly shown that the non-cooperative R&D investment decision game is, without technological spill-over, a prisoner’s dilemma with investing firms (there is a conflict between self-interest and mutual benefit of investing in R&D), and a deadlock (there is no conflict between self-interest and mutual benefit of investing in R&D) only whether the extent of technological spill-over is sufficiently high. Network externalities and product compatibility challenge this result. In fact, outcomes antithetical to those emerging in a non-network industry do exist. Under symmetric full compatibility, the game is a deadlock also without spill-over effects. Under symmetric incompatibility, the game can be a prisoner’s dilemma irrespective of the extent of the technological spill-over. From a policy perspective, the article shows that R&D subsidies or taxes can be used as social welfare maximising tools depending on the extent of the network externality and the degree of product compatibility. The work focuses on Cournot rivalry, but results hold also for price-setting firms (Bertrand rivalry).

Advertising Decisions of Platform Supply Chains Considering Network Externalities and Fairness Concerns

With the popularization of platform economics, many manufacturers are shifting their operations from offline to online, forming platform supply chains (PSCs), which combine e-commerce with supply chain management. To study the influences of network externalities and fairness concerns on advertising strategies of the platform supply chain (PSC), we construct decentralized decision-making models, with and without fairness concerns. Then, we solve the optimal decisions regarding PSC and use numerical examples to verify the conclusions of the decision models. We further analyze the internal influences of advertising strategies on network externalities in the extended model. We find that the network externalities are beneficial to the PSC system, but the manufacturer’s fairness concerns are not beneficial to the PSC. The advertising strategies of the network platform are not affected by network externalities and fairness concerns. In the extended model, the manufacturer can obtain more profits, but the network platform yields less profit than the decentralized model without fairness concerns. Moreover, the more sensitive the network externalities are to the change in advertising strategies, the greater the profits for the PSC members.

New geographies of platform capitalism: The case of digital monopolization in Turkey

The rise of digital platforms is growingly acknowledged as a pivotal characteristic of contemporary capitalism. A subset of the literature on digital platforms scrutinized the political economy of platform companies, their data-driven business models along with the economic, social, and political consequences of platformization. Yet, this strand has been overwhelmingly interested in Big Tech companies in the United States and China. In this article, I aim to expand the geographical span of this emerging literature by scrutinizing platformization dynamics in Turkey, a middle-income country that has not been systematically examined so far along these lines. To this end, I present an assessment on the overall platform landscape in Turkey by focusing on three highlight digital platforms (Trendyol, Hepsiburada, and Getir). My analysis on the trajectory of these three platforms indicates the following. First, these platforms have exhibited meteoric growth rates and have risen among the most valuable companies in Turkey in a tremendously short period of time. Second, their aggressive growth strategies based on data extraction and network externalities have led to a strong monopolization drive. Third, they have rapidly expanded into adjacent business areas, transforming themselves into infrastructural components of the domestic economy, with profound impacts on production, trade, and labor relations. Fourth, they remain dependent on the infrastructure laid by Big Techs. These findings suggest that platformization is rapidly transforming economic landscapes other than the United States and China as well, yet in an uneven and dependent form, underlining the need to broaden the geographical focus of the concerned literature.

Platform subsidy policy design for green product diffusion

With the advent of information technology, online platforms have become an vital intermediary for acquiring green information and purchasing green products. This study uses two-sided market theory to estimate the size of the green market for green subsidies under various targets. First, we compare the differences in the equilibrium market size and platform profits for three scenarios (no subsidy, maximum platform profits, and maximum social welfare). In addition, we measure the basic conditions for start-up subsidy schemes. Finally, we employ numerical analysis to explore how other critical factors, including cross-network externalities, product pricing, and research and development (R&D) costs, impact the market size in three scenarios. The result demonstrates how online platforms use cross-side network externalities to design asymmetric pricing strategies or subsidy policies to develop the market for green products. It has managerial implications for online platform owners or politicians in subsidizing the expansion of green products.

Analysis of Impact of Network Externality Product Bundling Announcement Strategy

In the information age, typically buyers bear costs when they change their shopping habits. Therefore, it is indispensable that manufacturers know these costs during transitioning technology and brand for success in the current information economy. Previous research about switching costs emphasized corporate behavioral tactics and corporate competitiveness in the market. However, in these models, customers do not indeed change the account of the business, being charged the same price, and the switching cost is higher enough to prevent conversion. In reality, customers’ brand changes. This research hypothesizes that commodity’s consumption utility with externality increase with an increase of disposable income and externality but decreases with increasing of reservation utility’s shadow price when concerning consumption’s switching cost and endogenizing costumers behavior. When a product announcement makes a consumer group’s preference for externalities greater than that of another consumer group, the externality of its brand announcement inevitably increases. However, to increase the externality, it is necessary to attract more users to join the purchase of the brand, which naturally increases the manufacturer’s request for the creation of forenotice and the switching cost also increases.

Estimating the Costs of Standardization: Evidence from the Movie Industry

AbstractThis article studies the decentralized adoption of a technology standard when network effects are present. If the new standard is incompatible with the current installed base, adoption may be inefficiently delayed. I quantify the magnitude of “excess inertia” in the switch of the movie distribution and exhibition industries from 35 mm film to digital. I specify and estimate a dynamic game of digital hardware adoption by theatres and digital movies supply by distributors. Counterfactual simulations establish that excess inertia reduces surplus by $16\%$ relative to the first-best adoption path; network externalities explain $41\%$ of the surplus loss. Targeted adoption subsidies or a mandate on digital distribution help bridge this welfare gap.

Impact of climate smart agriculture on food security: An agent-based analysis

The study proposes an agent-based model to investigate how adoption of climate smart agriculture (CSA) affects food security. The analysis investigates the role of social and ecological pressures (i.e. community network, climate change and environmental externalities) on the adoption of physical water and soil practices as well as crop rotation techniques in rural Ethiopia. The findings reveal that CSA can be an effective strategy to improve the rural populations' well-being for farm households with access to capital, strong social networks and access to integrated food markets. The climate scenario simulations indicate that farmers adopting CSA fare better than non-adopters, although CSA adoption does not fully counterbalance the severe climate pressures. In addition, farmers with poor connections to food markets benefit less from CSA due to stronger price oscillations. These results call for an active role for policy makers in encouraging adaptation through CSA adoption by increasing access to capital, improving food market integration and building information sharing among farmers.

Supply Chain Coordination of Product and Service Bundling Based on Network Externalities

Since the commercialization of 5G, the government has actively encouraged 5G industry chain enterprises to accelerate the progress of 5G. Bundling is a popular means to expand 5G subscribers and improve 5G market coverage. Considering the characteristics of bundling, this study establishes a secondary supply chain composed of a terminal manufacturer and a telecom operator under the condition of network externality strength. In this supply chain, the product quality of the terminal manufacturer is complementary to the service quality of the telecom operator. Using Steinberg’s theory, we derive the optimal value of each decision variable in a centralized mode and a decentralized mode and take profit maximization as the goal. This paper also designs a contract of bidirectional cost sharing and revenue compensation for supply chain coordination. Finally, the influence of network externality strength and a mass-additive factor on the supply chain is discussed using numerical analysis. The results show that higher network externality strength has a significant impact on product pricing, the quality of each entity and the profit of the supply chain. At the same time, the degree of complementarity between the terminal product quality and the telecommunications service quality affects whether consumers choose to buy contract products. A higher degree of complementarity promotes the market inflow into high-end consumers.