Network Externalities Research Articles

Channel Management for Digital Products in the Two-sided Market with Network Externality Effects

Channel selection is a critical trade-off for digital products firms whose products are characterized by network externality. This work develops the models of consumers’ utility impacted by the network externality for two channel strategies of the digital product firms in the two-sided market: direct channel strategy and platform channel strategy. Deriving from the consumers’ utility, the optimization models of the two channel strategies are presented. The optimization models are solved through the Lagrangian method, and the comparative statics analysis is conducted to investigate the effect of network externality on optimality. Mathematical results show that if the intensity of network externality in the online platform surpasses that in the direct channel, the platform channel strategy dominates the other channel strategy; otherwise, the direct channel strategy is the firms’ optimal decision. In addition, the two channels share the equal optimal price, and the firms’ profit (and demand) would be positively impacted by the network effect and the products’ features but negatively impacted by the consumers’ learning cost. This work provides decision support for the digital product firms on channel selection in the context of the two-sided market.

The Strategic Adoption of Environmental Corporate Social Responsibility with Network Externalities

Abstract This paper adopts a green managerial delegation model in a polluting network industry wherein consumers form fulfilled rational expectations of network externalities. We show that firms are consistently incentivized to undertake ECSR (environmental corporate social responsibility) under price competition, while positive network externalities can increase the strategic level of ECSR. We also show that product substitutability between network products can play an important role in determining a firm’s strategic level of ECSR and resulting profits. Finally, ECSR is conducive to increasing environmental quality and social welfare in a high-polluting network industry. Therefore, the strategic adoption of ECSR in a network industry is Pareto-improving as environmental damage becomes serious.

Segregation, Education Cost, and Group Inequality

Abstract This study analyzes the interplay between the segregation level, education cost, and the evolution of group inequality. In a market economy, individuals have incentives to invest in skill acquisition because of wage differentials. Because skill achievement is costly, a person with a higher inherent ability or a better community background is more likely to invest. Bowles, Loury, and Sethi (2014) show the possibility of group inequality evolution with a high level of segregation when network externalities over the skill acquisition period affect an individual’s decision of skill achievement. This study emphasizes the effect of education costs on the evolution of group inequality. Even when the level of segregation is high, if the societal education cost of skill acquisition is not sufficiently large, group skill disparity may not evolve. Observing that education costs vary significantly across countries depending on the structure of their educational institutions, this theoretical analysis suggests that some countries may suffer more from between-group disparity than others because their education systems impose higher costs on individuals.

Does Urban Agglomeration Promote the Development of Cities? Evidence from the Urban Network Externalities

This paper discusses whether urban agglomeration can promote urban growth from the perspective of network externalities. Although agglomeration externalities play an important role in promoting regional development, improved accessibility makes urban network externalities an influential force in reshaping regional economic growth. This paper identifies the urban network based on the data of train frequency and travel time data among 271 cities in China. Then, the spatial Durbin model is used to investigate the effect of urban agglomeration on economic growth from the perspective of urban network externalities. The results demonstrate that there are significant network externalities among cities in China, which play a pivotal role in boosting urban growth. Interactions among cities produce cross-regional spillovers, causing network externalities to no longer be dependent on geographical proximity. This is significantly different from agglomeration externalities that are limited to a certain regional scale. As the scope of the urban network expands, network externalities become more pronounced. Different regional characteristics all lead to heterogeneous results of network externalities. The construction of high-speed railways, as well as the well-developed urban network system, strengthen the positive impact of network externalities. Smaller cities benefit more from higher-level urban networks than regional networks.

Manufacturer encroachment with a new product under network externalities

We study manufacturer encroachment in a two-echelon supply chain consisting of a manufacturer (her) and a retailer (him), in which she distributes a classic product through the retailer and endogenously determines whether to launch a new product with network externalities in a new direct sales channel. Analytical results show that the bar for the manufacturer to encroach with the new product is always lower than that for her to encroach with the same product and this bar can be further reduced by offering a more differentiated new product. We further establish that the retailer can be completely driven out of the market by encroaching with the new product, which is impossible under encroachment with the same product. Contrary to the conventional wisdom that the manufacturer should actively promote her new product under new-product encroachment, our research reveals that investing in enhancing the new product's network externalities can be detrimental to her profitability. Moreover, when the manufacturer cannot improve any of the following three factors to the right level, the strength of network externalities, direct sales channel efficiency, or product differentiation level, it is better for her to encroach with the same rather than new product. Counterintuitively, when network externalities are relatively weak and the direct sales channel is less efficient, the retailer prefers the manufacturer to encroach with the same rather than weaker new product.

Public Interest in Islamic Equity Crowdfunding

Equity Crowdfunding is an alternative investment instrument. Indonesia, with the largest Muslim population, is a potential market for Islamic Equity Crowdfunding. The purpose of this study is to identify the motivation of investors to invest in this instrument. There are three subject sizes, namely, related to project funding (network externality and perceived informativeness), related to a platform (perceived accreditation, structural assurance, and third-party seal) related to fundraising (Islamic value congruence, social interaction ties). Belief perspective is divided into cognitive and affective. The sample used is 101 investors spread across Indonesia in a national equity crowdfunding company with Islamic-based management. The data was processed using the structural equation modeling technique using the WarpPLS 7.0 tool. The results of this study prove that cognitive and affective beliefs and network externalities directly influence investor interest. Trust is proven to be able to mediate perceived informativeness on interest. The form of investor cognitive trust is perceived accreditation and third-party seal. The shapers of an investor's affective trust are perceived informativeness, structural assurance, and Islamic value congruence. This finding can be used as the basis for how startup companies in Sharia-based equity crowdfunding instruments build trust and interest.

Evolutionary game study of crowdsourcing open innovation synergy mechanism

Open innovation crowdsourcing can help enterprises meet the challenges of a rapidly changing environment and improve their innovation performance. This study introduces network externalities as influencing factors of the crowdsourcing open innovation synergy mechanism. This study constructed the game payment matrix of the crowdsourcing open innovation synergy mechanism, and the evolutionary game method obtained the equilibrium solution of the crowdsourcing open innovation synergy mechanism. The impact of changes in the main influencing factors on the issuers' and receivers’ willingness to collaborate and innovate was explored through numerical and case studies. The study shows that the higher the synergy benefit and its allocation coefficient need to be within a reasonable range for the willingness to collaborate and innovate to increase; the lower the original cost of both parties, and the higher the cost reduction coefficient under the policy support of the crowdsourcing platform, the higher the willingness to collaborate and innovate; the higher the network externality and the lower the penalty for breach of contract, the higher the desire to collaborate and innovate. The study recommends strengthening non-school education to guide innovation for all, and refining relevant policies to tailor innovation to local conditions. This study provides a new perspective and theoretical guidance for enterprises to build a crowdsourcing open innovation synergy mechanism and is a valuable reference for open innovation management.

Signal effect of government regulations on ride-hailing drivers’ intention to mobile-based transportation platform governance: Evidence from China

The emergence of the ride-hailing economy has brought many benefits to society but has also presented several unprecedented governance challenges. To address the latter, a cooperative governance mode joined by multiple agents has been suggested as a potential regulatory paradigm for shared platforms. However, how government regulation affects governance participation intentions among different stakeholders remains unclear. To shed light on this issue, this study examines how ride-hailing drivers of China perceive government regulation and regulatory events and how this perception affects their intentions to participate in governance. The methodology involves two stages: interviews with 30 ride-hailing drivers and questionnaires completed by 375 drivers, followed by an empirical analysis. Results indicate that perceived government regulation and perceived values significantly influence governance participation intentions among ride-hailing drivers. Additionally, government regulatory events and positive network externality have a partial moderating effect on this relationship. These findings suggest that while external regulatory environment and regulatory return can increase governance participation intentions, they are insufficient to support co-governance. To effectively realize co-governance, governments must overcome the state-centrism bias that treats informal subjects (stakeholders) in platform governance as passive “participants” or “recipients.” This scenario can be achieved by advancing policy and issuing deliberation mechanisms that increase the formal position of drivers in platform governance, thus sending a signal to drivers that they are valued participants in the governance process.

Mathematical Optimization on Hybrid Channel Pricing Digital Products in Two-Sided Market with Network Effect

In the two-sided market where the third-party platforms connect the providers and consumers, the online platforms become the significant distribution channel of digital products; therefore, the digital product firms face the hybrid channel pricing problem in the two-sided market in which the products are launched through the platform channel and the existing direct channel. Because the network externality effect is the significant economic characteristic of digital products and services, the current work presents the models of consumers’ utility obtained by adopting digital products from the direct and platform channels, and the utility models use the network effect in the direct and platform channels as the parameters. The optimization model on pricing is derived from the utility models and solved mathematically. The closed-form solutions show that the price in the direct channel is supposed to be lower than that in the platform channel, while the prices of digital products would be affected by the network effect only when the products are distributed through the direct channel. The comparative statics analysis on the network effect illustrates that the network effect in the direct channel and the platform channel would, respectively, have the positive and negative impact on the products’ prices and the firms’ profit. The current work explores the hybrid channel pricing problem and provides insights for the digital product firms on the optimal pricing decision in the context of the emerging platform economy.

Drivers of Mobile Payments Acceptance: The Impact of Networks Externalities

Drivers of Mobile Payments Acceptance: The Impact of Networks Externalities

The Role of Social Media in Enhancing Communication and Collaboration in Business

The study aimed to highlight the importance of effective communication and collaboration in modern business, and how social media can be used as a vital tool to connect with customers, employees, and other stakeholders in new and innovative ways. Effective communication and collaboration are essential to the success of any business, particularly in the modern era, where competition is intense and innovation is required to stay competitive. To accomplish their goals, businesses must be able to communicate ideas, feedback, and information efficiently and effectively. Social media has become an indispensable instrument for connecting with customers, employees, and other stakeholders in novel and creative ways, resulting in increased innovation, enhanced productivity, and a more engaged and motivated workforce. Businesses can improve their knowledge transfer processes and foster a culture of continuous learning and innovation by leveraging social media platforms. Favourable network externalities in social media refer to the favourable effects that result from an increase in social media platform usage. This allows businesses to reach a larger audience and increase brand recognition. Social media can also provide valuable insights into customer behaviour and preferences, allowing businesses to tailor their marketing strategies and products to suit their customers' needs. Social media monitoring is essential for the growth of business capital because it enables businesses to measure their online reputation and respond promptly to any negative comments or feedback. However, social media has been linked to melancholy, anxiety, and addiction. Therefore, businesses must take steps to mitigate the negative effects of social media on the mental health of their employees, such as providing mental health support services and promoting healthy social media usage.

Optimal pricing strategy for content products under competition: Pay-as-you-want or fixed-price?

PAYW (pay as you want) has become a popular pricing strategy for content products in practice and has received considerable attention in the literature. However, the previous literature mainly justifies this pricing strategy in the monopoly setting. By exploiting a duopoly setting, this paper analytically investigates the impact of competition on the value of PAYW by comparing it to the traditional fixed pricing (FP) strategy. We find that only symmetric equilibria exist, i.e., both sellers choose PAYW when the fairness ideal is sufficiently high in equilibrium; otherwise, both choose FP. In sharp contrast to the prior literature, we find that multiple equilibria can exist, and a prisoner’s dilemma situation can arise when the fairness ideal is at a medium level. We also find that the fairness ideal has a nonmonotonic impact on social welfare, and the presence of network externality makes PAYW preferable under competition. We also show that our results qualitative hold when consumers have heterogeneous product values.

The Timing of Technology Adoption in Network Industries

This paper analyzes the effect of network externalities on firms’ timing of new technology adoption in a network industry. In a pre-commitment game under Cournot competition, network effects tend to accelerate the timing of the leader and the follower regarding their adoption dates: under the rational expectations hypothesis and also under the firms’ output commitment. However, while an increase in network effects tends to reduce the discrepancy between the optimal social timing of the new technology adoption and the market-driven time of adoption in the rational expectations model, the opposite occurs under the output commitment game.

The Influence of Network Externality and Fear of Missing out on the Continuous Use of Social Networks: A Cross-Country Comparison

Despite social networks’ prevalence and unlimited benefits, their adoption rates are still unsatisfactory. This cross-country research aims to examine the impact of network externality (NE) and fear of missing out (FOMO) on the continuous use of social networks, which in turn, affects users’ self-esteem. To achieve this aim, a conceptual model is developed by extending the unified theory of acceptance and use of technology 2 (UTAUT2) with three new factors: NE, FOMO, and self-esteem. The model is tested using a quantitative research design based on data collected through online surveys from 841 social media users in Qatar and Jordan. The data were analyzed using partial least squares-structural equation modeling (PLS-SEM). The results indicated that the continuous use of social networks is positively affected by performance expectancy (PE), hedonic motivation (HM), and FOMO in both samples. The continuous use is also affected by effort expectancy (EE) in the Jordanian, but not the Qatari sample. In contrast, NE significantly affects the continuous use among Qatari respondents, while this relationship is not supported among their Jordanian counterparts. More interestingly, the continuous use of social networks positively impacts users’ self-esteem across the two samples. In summary, this research goes beyond what was examined in the UTAUT2 by investigating the consequences of continuous use on users’ self-esteem. The incorporated constructs extend the theoretical perspective of the UTAUT2 by integrating new determinants of the continuous use (i.e., FOMO and NE) and new outcomes of that use (i.e., self-esteem). The reflection of the impact of these factors in a cross-country comparison provides insights into the variation in using social networks between different countries.

Internationalization of I-business Firms: The role of distance on location choice

We examine the impact of cross-national distances based on the CAGE framework (i.e., cultural, administrative, geographic, and economic) on the location choice of I-business firms. While technology enables I-business firms to internationalize at a faster pace, unfamiliarity and uncertainty of distant host countries may still affect their location choice. Further, we identify two firm-level contingencies – 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, geographic and economic distances negatively impact the location choice. While direct network externalities strengthen the negative relationship between certain types of distance and location choice, a business-to-business (B2B) model weakens that relationship. Our study demonstrates the continuing role of distances on the internationalization of I-business firms.

The spread of COVID-19 in London: Network effects and optimal lockdowns

We generalise a stochastic version of the workhorse SIR (Susceptible-Infectious-Removed) epidemiological model to account for spatial dynamics generated by network interactions. Using the London metropolitan area as a salient case study, we show that commuter network externalities account for about 42% of the propagation of COVID-19. We find that the UK lockdown measure reduced total propagation by 44%, with more than one third of the effect coming from the reduction in network externalities. Counterfactual analyses suggest that: (i) the lockdown was somehow late, but further delay would have had more extreme consequences; (ii) a targeted lockdown of a small number of highly connected geographic regions would have been equally effective, arguably with significantly lower economic costs; (iii) targeted lockdowns based on threshold number of cases are not effective, since they fail to account for network externalities.

Network Externality Effects on Behavioral Intention to Use Consumer Internet of Things Among Urban Citizens in Indonesia

Abstract One of the most popular technologies is the internet of things (IoT). It refers to the number of users and penetration in the industry (I-IoT) and consumer (C-IoT) sectors. The previous stud-ies indicated that the usage rate of the C-IoT is outperforming the I-IoT worldwide. However, the contrary indication occurred in Indonesia. Among developing countries, the spending level of IoT in Indonesia is significant, but the use level of the technology is less developed. This survey study purposed to predict what factors influence the behavior intention to use C-IoT. The researchers extended the unified theory of acceptance and use of technology (UTAUT) model by adopting the network externality aspects. Around 400 valid data were collected from urban communities in the six most populous provinces in the country. The scholars used the partial least squares structural equation modeling (PLS-SEM) method using SmartPLS 3.3 in the data analysis stage. The findings expressed that the number of users and social influence factors are not influential factors influencing behavior intention to use IoT. Besides that, the UTAUT model extension may also be one of the theoretical references for future similar studies. Practically, the findings may also be one of the considerations for the stakeholders of C-IoT implementation in Indonesia.

Matching and Network Effects in Ride-Hailing

A recent empirical literature models search and matching frictions by means of a reduced-form matching function. An alternative approach is to simulate the matching process directly. In this paper, we follow the latter approach to model matching in ride-hailing. We compute the matching function implied by the matching process. It exhibits increasing returns to scale, and it does not resemble the commonly used Cobb-Douglas functional form. We then use this matching function to quantify network externalities. A subsidy on the order of $2 per trip is needed to correct for these externalities and induce the market to operate efficiently.

Could AI livestream perform better than KOL in cross-border operations?

AI livestream with virtual anchors enables the global brands to promote products by transcending cultural disparities. So the novel business model incorporating AI livestream in cross-border operations is worth investigating to show the tradeoffs in the global brands’ decision between AI and the widely adopted key-opinion-leader (KOL) livestream. We focus on the direct channel because such concern does not exist in the reselling channel by the use of local retailers. We develop a cross-border co-opetition model to show the bright and dark sides of AI livestream, where the tariff cost difference between the livestream channel and the existing retail channel are taken into account. We show that, although the novel features of AI livestream are extensively formulated, this new promotion tool can be beneficial only when (1) the network externality among livestream fans is very strong; or (2) the network externality is relatively weak but the tariff cost in the retail channel is high. The underlying rationality can be interpreted by two interesting effects for the offline retail channel, namely the “suppress effect” in AI livestream and the “bailout effect” in KOL livestream. We further examine the impact of cross-border logistics cost and the KOL’s stronger network externality to show the robustness of the main findings.

The Roles of Trust and Its Antecedent Variables in Healthcare Consumers' Acceptance of Online Medical Consultation during the COVID-19 Pandemic in China.

Online medical consultation (OMC) is generating considerable interest among researchers and practitioners due to the mandatory quarantine measures implemented during the COVID-19 pandemic in China. However, the acceptance rate of OMC has declined over time. This paper aims to empirically investigate OMC acceptance using a proposed research model by integrating the technology acceptance model (TAM) with trust and its antecedent variables. A quantitative self-administered cross-sectional survey was conducted to collect data from 260 healthcare consumers. A partial least squares structural equation modeling method was used to examine the data. Results revealed that healthcare consumers' behavioral intention was influenced by attitudes, while perceived usefulness and trust significantly influenced behavioral intention through attitude as a mediator. In addition, perceived risk, perceived privacy protection, network externalities, cognitive reputation, and interactivity directly influenced trust. Overall, the research model explained 50% of the variance in attitude and 71% of the variance in behavioral intention. The study's findings should provide useful insights into making effective design, development, and implementation decisions for OMC services.