Network Externalities Research Articles

Network Externalities and Market Dominance

We propose a monopoly and Stackelberg duopoly model for “new economy” markets—with a Beckerian S-shaped demand curve at its center—that allows for intermediate degrees of firm focality and consumer heterogeneity. Because of network externalities, firms compete for the dominant market share, rather than the marginal consumer. This leads to a type of limit pricing—from within, rather than from outside the market—where the nondominant firm captures a positive market share that serves as a consolation prize. We characterize how firms’ technologies, “consumer impulses” (which might be influenced by past sales, defaults, or advertising), and network externalities affect competition, and derive implications for firm strategy. Broadly speaking, we find that the dominant firm should adopt an aggressive “top-dog” stance (akin to, but not identical to, that of a firm seeking to deter rival entry), whereas the nondominant firm should respond with an accommodating “puppy-dog” approach. This paper was accepted by Alfonso Gambardella, business strategy. Funding: R. Akerlof received financial support from the Institute for New Economic Thinking.

Central bank digital currency: Payment choices and commercial bank profitability

This study examines how the issuance of a central bank digital currency (CBDC) affects consumers' payment instrument choices, asset allocation decisions, and the profitability of financial intermediaries. Specifically, we advance a theoretical model in which introducing an interest-bearing CBDC expands market participants' payment and investment options but also poses a potential threat to financial intermediaries if it raises their borrowing costs significantly. The existence of a network externality further complicates the analysis by affecting consumers' choice of payment mechanism. Our results suggest that the issuance of a CBDC is a double-edged sword for an economy. Although it provides additional payment and investment options for market participants, it increases competition and weakens financial intermediaries' margins.

Exploring the antecedents of trust and users’ continuance intention in hybrid online travel platforms: the role of network externalities and platform quality

ABSTRACT Drawing from network externalities perspective in the Economics literature, this study investigates the antecedents of trust and users’ continuance intention in the context of hybrid online travel platforms (HOTPs). Data were obtained by surveying 489 users of HOTPs in China. The empirical results based on the PLS-SEM model showed that indirect and direct network externalities positively influence functional quality and hedonic quality respectively. Furthermore, both functional quality and hedonic quality of HOTPs positively affect users’ trust, which in turn positively affects users’ continuance intention and negatively affects perceived risks.

A Study of Player Behavior And Social Influences to Purchase Intention Mobile Legends: Bang Bang In-Game Item

Purpose: This quantitative study aims to analyze the interest in buying items and skins in the online game Mobile Legends in Indonesia, especially in East Java Province by looking at the psychological and social factors of game players. Player behavior is a psychological factor and social factors are social influence variables.
 Design/methodology/approach: The number of samples in this study was 310, the sampling method used purposive sampling. Respondents are active Mobile Legends game players who have participated in answering our research questionnaire. The data collection method uses online questionnaire distribution using Google Forms. Measurement of data using answers with a Likert scale of 1 to 10 with 1 point strongly disagree and 10 points strongly agree. Data were analyzed using the PLS-SEM method using Smart PLS 3.0 software.
 Findings: Player behavior includes achievement, challenge, escapism, and social interaction. Social influences consist of network externality and community involvement. The results of our research show that player behavior consists of achievement, challenge, escapism, and social influences such as network externality, and community involvement have a significant positive effect on Purchase Intention.
 Originality/value: This study explores the purchase intention of virtual item in the mobile legends game using the uses and gratifications theory (U&G). The application of U&G theory is seen from the behavior of the players. Social influences is also applied to see the influence from outside the players.

Differential pricing in social networks with strategic consumers

This study analyzes a monopolistic seller's optimal differential pricing problem with strategic consumers connected in social networks. The consumers who purchase in the later period can get positive externalities from their friends who purchased in the early period but have to bear a utility discount for the delayed consumption. We first characterize consumers' strategic purchase decisions under general network structures. We then derive the optimal differential pricing strategies and demonstrate that different network structures lead to substantially different strategies. We find that when the intensity of the network externality effect is lower than a threshold and the influence matrix is symmetric, it is always optimal for the seller to conduct an increasing‐pricing strategy. However, when the network externality effect is strong, a decreasing‐pricing strategy may also be optimal. We further examine how the imbalance of influence, degree heterogeneity, and network topology impact the optimal pricing policy and profit. We find that when the intensity of network externality is relatively low, it is more profitable to sell products through many interconnected low‐influencer networks; however, when the network externality intensity is high, it is better to sell through a few high‐influencer networks. Finally, we show that the profit loss caused by uniform pricing strategies or by ignoring consumer network structures can be significant under certain conditions, thereby revealing the substantial value of differential pricing in social networks.

How social networking ties mediate the associations between enterprise social media affordances and employee agility?

The rising diffusion of enterprise social media (ESM) platforms worldwide necessitates a deeper understanding of how specific ESM affordances impact contemporary performance parameters such as employee agility. Drawing motivation from the propositions of the affordance theory, social network theory, and the extended scholarly work on ESM, agility, and networking, we conceptualized a sequential model to determine how three ESM affordances—self-expression via microblogging, recognition via paralinguistic digital affordances (PDAs), and network externality—associate with two types of social networking ties (instrumental and expressive) and how these ties further associate with employee agility—measured through proactivity, adaptability, and resilience. Analysis of data collected from 318 Chinese professionals with experience using ESM in their workplaces revealed the following positive relationships: (a) PDAs and externality are associated with both instrumental and expressive ties, while microblogging is associated with expressive ties only; (b) instrumental ties are associated with proactivity, adaptability, and resilience, while expressive ties are associated with proactivity and resilience only; (c) instrumental ties mediate the relationships between PDAs and all agility dimensions, as well as between externality on the one hand and proactivity and resilience on the other; and (d) expressive ties mediate the relationships between the affordances and both proactivity and resilience. These findings yield valuable theoretical and practical insights.

Learning and selfconfirming equilibria in network games

Consider a set of agents who play a network game repeatedly. Agents may not know the network. They may even be unaware that they are interacting with other agents in a network. Possibly, they just understand that their optimal action depends on an unknown state that is, actually, an aggregate of the actions of their neighbors. In each period, every agent chooses an action that maximizes her instantaneous subjective expected payoff and then updates her beliefs according to what she observes. In particular, we assume that each agent only observes her realized payoff. A steady state of the resulting dynamic is a selfconfirming equilibrium given the assumed feedback.We identify conditions on the network externalities, agents' beliefs, and learning dynamics that make agents more or less active (or even inactive) in steady state compared to Nash equilibrium.

Investment decisions regarding internet financial products considering network externalities: a mixed-method approach

Purpose This study aims to provide an in-depth understanding of investors’ cognition and decision-making process with regard to internet financial products. The objective is to effectively guide users’ rational investments.Design/methodology/approach First, based on grounded theory, this study develops a tool for measuring users’ perceived value (PV) of internet financial products via in-depth interviews. Then, after comprehensively considering users’ environmental, individual and psychological characteristics, this study proposes a theoretical model of internet financial product investment decisions based on the PV of users. Finally, an empirical study is conducted on 693 valid sample data from e-commerce and online banking financial platforms.Findings The empirical results suggest that network externalities influence users’ financial behavior by herding (HE) (imitating others and discounting their own information) and PV. PV and HE are key factors in users’ investment decisions with regard to internet financial products. Moreover, users’ self-efficacy (SE) and platform type play moderate roles in the influence mechanism.Practical implications The research conclusions provide valuable references for designing financial products and establishing regulatory rules, which will help the internet financial industry to grow soundly and innovatively.Originality/value This study uncovers the mediating effect of HE and PV between network externalities and users’ investment intentions in the context of internet financial products. In addition, the moderating effect of users’ SE and platform types is revealed.

Analysis of Internet Rent from the Perspective of Marx's Rent Theory: A Case Study of Mobile Internet Applications

People are now tightly connected through mobile Internet applications, whether they are platform owners, renters, business professionals, or users. The presence of Internet Rent is concealed between platform owners and renters of mobile Internet applications, according to Marx's rent theory. Owners of platforms lease out data land and charge Internet Rent to renters. Similar to land rent, Internet Rent demonstrates differential rent. However, due to the instantaneous replicability of data flow activities and the impact of network externalities, the former still differs from the latter in terms of social relationships, the existence of Absolute Rent, and the form of Differential Rent II.

Managing Competition from Within and Outside: Using Strategic Inventory and Network Externality to Combat Copycats

Problem definition: Prior studies have identified the role of downstream retailers’ strategic inventory in mitigating double marginalization within decentralized supply chains. Our work adds to this literature by introducing two relevant features that naturally appear in a dynamic environment: network externality and copycatting. We demonstrate how strategic inventory and network externality can be used to manage competition from within and outside the supply chain. Methodology/results: We develop a game-theoretical model to capture the strategic interaction within a brand-name supply chain, which enjoys positive externalities from early-period sales but faces competition from copycats in later periods. We show that copycats, on the one hand, deter the retailer’s strategic inventory by exerting external competition and on the other hand, can amplify the benefit of the retailer’s strategic inventory in allaying internal double marginalization and enhancing the supply chain’s external competitiveness. We further show that network externality, on the one hand, brings immediate gains to the supply chain’s external battle with copycats and on the other hand, creates internal inefficiency in the form of cross-period double marginalization best exhibited under the supplier’s dynamic contract. When network externality and strategic inventory are optimized jointly, we find that they are always complementary in increasing the supplier’s payoff but can be substitutive to the retailer under a large inventory cost and weak network externality. Managerial implications: Our work provides firms ways of managing decentralized supply chains in the face of copycats. We propose strategic inventory and network externality to combat copycats and provide normative guidance on their operating mechanisms. Funding: C. Jin received financial support from the Singapore Ministry of Education Academic Research Fund [Tier 1 Grant 251RES2101]. Y.-J. Chen received financial support from Hong Kong RGC [Grants GRF 16500821 and HKUST C6020-21GF]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2021.0182 .

Exploring lead users' continued participation intention in crowdsourcing innovation community in China: the effects of network externalities

PurposeLead users are essential participants in crowdsourcing innovation events; their continuance intention significantly affects the success of the crowdsourcing innovation community (CIC). Although researchers have acknowledged the influences of network externalities on users' sustained participation in general information systems, limited work has been conducted to probe these relationships in the CIC context; particularly, the predictors of lead users' continued usage intention in such context are still unclear. Hence, this paper aims to explore the precursors of lead users' continuance intention from a network externalities perspective in CIC.Design/methodology/approachThis work ranked users' leading-edge status to recognize lead users in the CIC. And then, the authors proposed a research model based on the network externalities theory, which was examined utilizing the partial least squares (PLS) technique. The research data were collected from an online survey of lead users (n = 229) of a CIC hosted by a China handset manufacturer.FindingsResults revealed that the number of peers, perceived complementarity and perceived compatibility significantly influence lead users' continuance intention through identification and perceived usefulness.Originality/valueThis work contributes to the crowdsourcing innovation research and provides views regarding how lead users' sustained participation can be developed in the CICs. This work also offers an alternative theoretical framework for further research on users' continued intention in open innovation activities.

Authorization or Outsourcing: Considering the Contrast/Assimilation Effect and Network Externality of Remanufactured Products under Government Subsidy

This paper examines the impact of the contrast/assimilation effect and network externality of remanufactured products on remanufacturing mode selection for original equipment manufacturers (OEMs) under government subsidy. We develop a two-period Stackelberg game model in a closed-loop supply chain (CLSC) composed of an OEM and a third-party remanufacturer (TPR) considering two remanufacturing modes: authorization remanufacturing mode and outsourcing remanufacturing mode. The results show the following: (1) The OEM prefers to select authorization when the contrast/assimilation effect and government subsidy level are both relatively low; otherwise, the OEM prefers outsourcing. The TPR always prefers the outsourcing mode. Therefore, a win–win situation between the OEM and the TPR could be achieved through OEM outsourcing remanufacturing when the government raises subsidy levels or the contrast/assimilation effect is relatively obvious. (2) The outsourcing mode is more beneficial in promoting the sales of remanufactured products and is more environmentally friendly, while the authorization mode is better in regards to consumer surplus and social welfare. (3) OEM, TPR and CLSC could benefit from network externality increasing. The stronger contrast effect (assimilation effect) is profitable to the OEM and CLSC (TPR), but hurts the TPR (OEM and CLSC). (4) Government subsidy can significantly reduce consumer spending on remanufactured products. CLSC members encroach government subsidies which are offered to consumers through pricing adjustments. The findings provide managerial implications for OEMs’ remanufacturing mode strategy in the context of the contrast/assimilation effect and network externality of remanufactured products under government subsidy.

Resolving the patents paradox in the era of COVID-19 and climate change: Towards a patents taxonomy

This paper revisits the patents debate and considers the role of intellectual property rights and their impact on society in the context of inventions designed to protect global common pool resources (CPRs) such as public health and the environment. A review of the theoretical and empirical literature suggests that there has never been a clear consensus among researchers on the benefits of the patent system and intellectual property rights. As Robinson notes, “The patent system introduces some of the greatest of the complexities in the capitalist rules of the game and leads to many anomalies.” We explore these anomalies by specifying a taxonomy of patents for different classes of inventions, including inventions to protect CPRs. This includes vaccines and inventions that reduce externalities, such as, CFC gases and greenhouse gas emissions. In these instances, the effectiveness of innovations depends critically on rapid global diffusion. Our theoretical analysis utilises Ostrom's CPR dilemma to analyse the complexities surrounding innovation and CPRs.We find that the effectiveness of innovations to protect CPRs depends on industrial characteristics and the wider regulatory environment. Empirical evidence is brought to bear on these conclusions via 2 case studies that each embodies a natural experiment; one on vaccines pre- and post-TRIPS and one on environmental technologies to reduce CFC gases and CO2 emissions with and without an agreed UN Protocol. The insights gained are explored in our policy section. Our analysis suggests the need for a more nuanced approach to patent policy that is embedded in the wider context of innovation systems and takes account of the anomalies raised by CPRs. For CPR protecting innovations subject to positive network externalities, we advocate that policy should prioritise diffusion over private incentives for R&D and use alternative policies to patents to stimulate investment in R&D.

Abandon the idea of an “optimal economic path” for climate policy

AbstractMany economic modelers believe that there is an “optimal economic path” for solving the climate problem that exists independent of human choices. This belief rests on the notion that Integrated Assessment Models can determine the path that “maximizes global welfare” and, in turn, this path should drive climate policy. This commentary focuses on an under‐appreciated problem with that belief. We argue that the existence of pervasive increasing returns to scale, network externalities, learning curves, spillovers, and other nonlinear effects puts the idea of a single optimal economic path at odds with our current understanding of the most important forces driving the development of real economic and technological systems. We further argue that this idea is detrimental to rigorous understanding of climate solutions.This article is categorized under: Assessing Impacts of Climate Change > Scenario Development and Application Climate Economics > Economics and Climate Change Climate Economics > Economics of Mitigation

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.