Positive Network Effects Research Articles

Wireless Service Pricing Competition Under Network Effect, Congestion Effect, and Bounded Rationality

Mobile social networks have greatly strengthened people's online social interactions, generating massive volume of mobile data traffic, and bringing remarkable revenues to the wireless service providers. Meanwhile, the potential revenue growth is restrained by the network capacity of physical communication infrastructure and also challenged by the competition among service providers. In this paper, we study the pricing strategies of multiple service providers in a competitive data service market, where mobile users’ data consumption behaviors are influenced by two effects: the positive network effect and the congestion effect. To analyze the strategic interactions between mobile users and service providers, we devise a two-stage Stackelberg game consisting a pricing game in Stage I and a usage game in Stage II, respectively. In particular, for the usage game, we characterize the equilibrium solution and establish its uniqueness. For the pricing game, our analysis indicates that a mixed-strategy equilibrium solution is guaranteed for the scenario with rational providers as well as the scenario with providers of bounded rationality. We further develop a distributed learning algorithm for finding a mixed-strategy equilibrium solution in the second scenario. Our numerical results provide insights into how positive the network effect and the congestion effect would impact the system performance, and demonstrate that the bounded rational behavior incurs degradation to service providers’ revenues.

The impact of distribution channels on trial-version provision with a positive network effect

Many software developers provide end-users with feature-limited free trials to facilitate the distribution of their commercial products. Some international developers also authorize local agents to resell software products to consumers. In this paper, we explore a software developer’s optimal trial strategy in the presence of an agent. Due to the involvement of the agent, the double marginalization effect may result in a higher price and a lower demand for the commercial software. We find that, if the network effect is strong enough, the developer will release a trial version and attract trial users to secure greater positive externality, which is consistent with the case without an agent involved. However, if the network effect is weak, the developer may still release a trial version to the public, which sharply contrasts the case without an agent involved. A trial is offered in a bid to countervail the negative double marginalization effect. We also extend this work by endogenizing the trial-version quality, and examining the differentiation induced by trial offer decisions made by different firms in the supply chain. Furthermore, we investigate the effects induced by consumers’ differentiated costs of using the free trial and commercial versions.

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

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

Linking migrant enclave residence to employment in urban China: The case of Shanghai

ABSTRACTWith rapid economic restructuring, large-scale population migration, and market-oriented housing commercialization, China’s urban residents have experienced increasing segregation in both residential spaces and workplaces. Using the sixth census (year 2010) data with detailed geographic information for Shanghai, we document the residential patterns of local residents and migrants and identify the clustered enclaves of migrant workers. The results indicate that rural migrants in Shanghai feature a much higher level of residential clustering than do urban locals and urban migrants, with considerable concentration in the outskirts of the city. In investigating how the neighborhood contexts are associated with individuals’ employment outcomes, we find that migrant enclave residence is associated with positive employment outcomes for rural migrants, suggesting that the strong social networks that exist in these neighborhoods help them secure jobs. This positive social network effect is not shared by urban migrants or urban natives and is most evident among female migrant workers and those who live in locations with relatively low job densities.

Provisioning of ad-supported cloud services: The role of competition

Motivated by cloud services, we consider the interplay of network effects, congestion, and competition in ad-supported services. We study the strategic interactions between competing service providers and a user base, modeling congestion sensitivity and two forms of positive network effects: network effects that are either “firm-specific” or “industry-wide.” Our analysis reveals that users are generally no better off due to the competition in a marketplace of ad-supported services. Further, our analysis highlights an important contrast between firm-specific and industry-wide network effects: Firms can coexist in a marketplace with industry-wide network effects, but near-monopolies tend to emerge in marketplaces with firm-specific network effects.

Network Effects in Crowdfunding

textabstractWe study the various network effects that are at work on crowdfunding platforms. From a theoretical perspective, we distinguish between network effects that relate to participation or to usage decisions. We use novel entrepreneur-backer data to identify their relative importance on project funding dynamics. We empirically show that backers decide on their usage of the platform based on intra-project activity – as documented by prior work – but also on inter-project activity. In a difference-in-differences research design, we estimate that inter-project network effects account for 2-3% in the increase of contributions that projects generate on a daily basis. Then we find that participation decisions create a positive feedback loop fueling the growth of the platform and explaining how positive inter-project network effects can arise. Our results represent the first attempt in the literature to unbundle the web of network effects on project funding dynamics and suggest that many existing results in the crowdfunding literature are driven by network effects.

Social Interactions and Segregation in Public Housing Neighbourhoods in Singapore

This paper investigates cultural amenities and social interactions in Singapore’s resale public housing market. Based on a unique dataset on the Cash-Over-Valuation (COV), which measures differences between transaction prices and appraisal values, for a sample of 73,048 resale public housing transactions from 2007 to 2012, we find that COV per square meter (psm), which is a proxy for premiums that are above the “objective” values of houses, significantly increases with the fraction of a selected ethnic group in housing blocks. The results imply that buyers value social interactions and cultural affinity in housing blocks with high concentration of households of the same ethnic group. To live in a block with more than 90th percentile of residents from their own ethnic groups, Chinese or Malay buyers pay an additional SGD 98.74 and SGD 102.60 for COV per square meter (psm), respectively, which is equivalent to about 2.36% and 2.46%, respectively, of the average transaction prices. We also find that Chinese buyers pay SGD 43.63 more in COV psm in blocks with Chinese’s binding-quota, but pay SGD 11.24 and SGD 41.99 less in blocks with Malay’s and Indian’s binding-quotas, respectively. Lastly, we also show that additional COV are found relatively positive premiums for the within-ethnicity transactions relative to the cross-ethnicity transactions, which support the literature arguing on positive information spillovers and network effects between buyers and sellers of the same ethnicity group.

The Effect of Switching Costs on Prices: An Application to the Peruvian Mobile Phone Market

Based on a game theoretical model I previously developed, I present some evidence of the effect of the unlocked-handset policy recently implemented in Peru based on market analysis and reduced form empirical methods using consumer panel data. From the market analysis, declining prices are observed with the implementation of the policy in January 2015, also the switching rate rocketed since then. To retain consumers and attract rival's consumers, companies responded also with very low on-net prices through their private with unlimited minutes, which may have increased the network effects in the market. From my estimation, I found a significant negative effect of switching costs on demand for voice traffic (which suggest a positive effect of the unlocked-handset policy on demand) and positive network effects on the demand.

Networks and Selection in International Migration to Spain

This paper provides new evidence on migrant networks as determinants of the total size (scale) and skill structure of migration, using aggregate data from a recent migration boom to Spain. We draw upon McFadden (1984, 1422-1428) in order to develop and apply a three-level nested multinomial logit migration model. Our model accommodates varying degrees of similarity of destinations located in the same region (or the same country), allowing for a rich structure of substitutability across alternative destinations. We find strong positive network effects on the scale of migration and a strong negative effect on the ratio of high-skilled to low-skilled migrants. Simplifying restrictions on substitutability across destinations are rejected by the data.

NETWORKS AND SELECTION IN INTERNATIONAL MIGRATION TO SPAIN

We offer fresh evidence on the effect of migrant networks on two essential aspects of migration: (1) the total scale of migration and (2) the skill composition of migration. Our analysis is for the remarkable case of Spain, which experienced a full‐blown immigration boom from the mid‐1990s up to the Global Financial Crisis. To accommodate flexible substitution patterns across alternative migrant destinations, we use a three‐level nested multinomial logit model. We find a strong positive network effect on the scale of migration and a strong negative effect on the ratio of high‐skilled to low‐skilled migrants. Simplifying restrictions on the structure of cross‐destination substitutability are rejected by the data. (JEL F22, J61)

Informative Advertising in a Monopoly with Network Externalities

This paper studies the incentives for a monopolistic firm producing a good with network externalities to advertise when consumers face imperfect infor- mation and therefore must search to realize their actual willingness to pay for the good. A firm may disclose market information through advertising if it finds it beneficial. The results suggest that advertising is more likely in the case of a negative network effect and less likely with a positive network effect. When a monopolist faces a strong network externality, it chooses to support the maximum possible network and charge a price equal to the value of the externality. Finally, depending on the value of the search cost and type of network externality, a monopolist may use different advertising content: no information, price information only, product characteristics, or both price and product characteristics. Specifically, if all consumers have the same search cost, as the search cost grows the firm must include more informa- tion in the advertising content, while as the network externality changes from negative to positive, the firm reduces the content. In contrast, if consumers di¤er in their search costs, the firm tends to provide more information as the externality changes from negative to positive.

Exact Optimal Pricing under the Multinomial Logit Choice Model with Network Effects

We obtain exact semi-explicit solutions to the optimal pricing problem for the multinomial logit (MNL) consumer choice model with network effects, through a novel conditioning argument and the use of the Lambert W function. Then we manage to characterize the exact optimal solution in the presence of negative, positive and weak or positive and strong network effects, and also in the setting of heterogeneous market parameters. Furthermore, we provide a semi-explicit expression of equilibrium sales quantities in terms of equilibrium prices, based on which we establish sufficient conditions for the uniqueness of market equilibria. In addition, we provide an exact semi-explicit expression for the steady-state choice probability, based on which we discuss the uniqueness of the steady-state choice probability.

Exploring survival rates of companies in the UK video-games industry: An empirical study

The study presented in this paper investigates companies operating in the UK video-game industry with regard to their levels of survivability. Using a unique dataset of companies founded between 2009 and 2014, and combining elements and theories from the fields of Organisational Ecology and Industrial Organisation, the authors develop a set of hierarchical logistic regressions to explore and examine the effects of a range of variables such as industry concentration, market size and density on companies' survival rates. The analysis addresses locational dimension of the video-game industry is considered by introducing an extra regionally-related variable into the models, associated with the number of video-game university programmes locally available. In addition, companies are investigated with regard to their organisational type in order to identify potential effects associated with their intrinsic organisational structures.Findings from the analysis confirm that UK video-game companies operate in an increasingly globalised market, limiting the effects related to any operation conducted at a local level. For instance, a higher supply of specialised graduates within spatial proximity does not contribute significantly to increase the chances of survivability of video-game companies, although different locations seem to provide better conditions and higher life expectancy, mainly due to positive network effects occurring at a local level. Results seem also to suggest that investing in managerial resources increases businesses' survival rates, corroborating evidence about the significant role entrepreneurs have for companies operating within innovative and technologically intensive industries.

Quantifying Cross and Direct Network Effects in Online Consumer-to-Consumer Platforms

Consumer-to-consumer (C2C) platforms have become a major engine of growth in Internet commerce. This is especially true in countries such as China, which are experiencing a big rush toward e-commerce. The emergence of such platforms gives researchers the unique opportunity to investigate the evolution of such platforms by focusing on the growth of both buyers and sellers. In this research, we build a utility-based model to quantify both cross and direct network effects on Alibaba Group’s Taobao.com, the world’s largest online C2C platform (based in China). Specifically, we investigate the relative contributions of different factors that affect the growth of buyers and sellers on the platform. Our results suggest that the direct network effects do not play a big role in the platform’s growth (we detect a small positive direct network effect on buyer growth and no direct network effect on seller growth). More importantly, we find a significant, large and positive cross-network effect on both sides of the platform. In other words, the installed base of either side of the platform has propelled the growth of the other side (and thus the overall growth). Interestingly, this cross-network effect is asymmetric with the installed base of sellers having a much larger effect on the growth of buyers than vice versa. The growth in the number of buyers is driven primarily by the seller’s installed base and product variety with increasing importance of product variety. The growth in the number of sellers is driven by buyer’s installed base, buyer quality, and product price with increasing importance of buyer quality. We also investigate the nature of these cross-network effects over time. We find that the cross-network effect of sellers on buyers increases and then decreases to reach a stable level. By contrast, the cross-network effect of buyers on sellers is relatively stable. We discuss the policy implications of these findings for C2C platforms in general and Taobao in particular. Data, as supplemental material, are available at https://doi.org/10.1287/mksc.2016.0976 .

Provisioning of Large-Scale Systems: The Interplay Between Network Effects and Strategic Behavior in the User Base

In this paper, we consider the problem of capacity provisioning for an online service supported by advertising. We analyse the strategic interaction between the service provider and the user base in this setting, modeling positive network effects, as well as congestion sensitivity in the user base. We focus specifically on the influence of positive network effects, as well as the impact of noncooperative behavior in the user base on the firm’s capacity provisioning decision and its profit. Our analysis reveals that stronger positive network effects, as well as noncooperation in the user base, drive the service into a more congested state and lead to increased profit for the service provider. However, the impact of noncooperation, or “anarchy” in the user base strongly dominates the impact of network effects. This paper was accepted by Noah Gans, stochastic models and simulation.

Assessing the economic effects of server launches in free-to-play MMO games

In MMO (massively multi-player online) games, the interaction among thousands of players can produce both positive and negative network effects. It is therefore crucial for a company managing MMO games to establish how the entire user base should be distributed across different game instances (‘servers’) in order to optimize the players’ game experience and, ultimately, the company’s revenues. While splitting the user base onto different game servers is a common measure in the industry, there is a conspicuous lack of clear guidelines as to when launching new game servers would be advisable. Our work notably fills this gap: for a popular MMO real-time strategy game, our counterfactual simulation shows that a division of the user base across different game servers can lead to additional revenues if implemented at the right time. For the game in focus, our results indicate that launching multiple new game servers would be beneficial in terms of revenue when the game was new, and additional servers every 90–120 days when it was in decline.

Corporate Characteristics Motivating Standardization: The Case of Accounting Convergence in European Union

To identify how corporate characteristics impact the decision to converge, we tested three groups of European firms assigned into a group by the time of the IFRS adoption. Following the theory on network externalities, we hypothesize that companies with more business complexity and higher value benefit from a positive network effect and therefore, represent a driving force in accounting standardization. We provide evidence, that a firm’s business complexity and valuation characteristics have a significant impact on IFRS adoption. We also document that the extenuating effects of jurisdictions and national levels of bureaucratic formalities in business are factors that affect firms’ IFRS adoption decisions.

Why do users choose Open Source software? Analysis of the network effect / Dlaczego użytkownicy wybierają oprogramowanie Open Source? Analiza efektu sieciowego

This article analyses the phenomenon of using the Open Source software. Its aim is to verify the existence of a positive direct network effect that characterizes using of the Open Source software. The multivariate probit model is used to extract factors motivating users to the usage of the Open Source software. Special attention is paid to demographic characteristics of users, as well as to the impact of users' acquaintances, such as family, work and school on using the Open Source software. The results of the conducted analysis confirm our research.

Does Becoming a Platform Pay Off? Reconfiguring the Business Model for Two-Sided Markets

Digital technologies have opened new possibilities for firms to experiment with business models and deliberately change between them when new opportunities arise. We study a widely used platform-based business model in the software industry where consumers can use applications for free while being exposed to advertising that is charged for. Importantly, in this configuration the market structure is two-sided, where both positive direct network effects (i.e. social factors) and negative indirect network effects (i.e. nuisance due to ads) affect usage on the consumers’ side of the platform that then affects demand for ads. Changing from one-sided to two-sided market structure imposes a major systemic change in the business model that may significantly affect the performance of the focal firm. Based on the results from an agent-based simulation model, we find that especially when the initial business model with one-sided market structure is not optimized for performance, the change to the advertising busines...

Digital Life of Russian Megapolises: Model. Dynamics. Cases.

The paper introduces the Digital Life Index which provides a quantitative measurement of the progress of secondary digitalization in the Russian cities, covering the key aspects of modern urban life, such as transportation, finance, retail, healthcare, education, media, and administration. A separate measurement of the development of supply, and helps to reveal the gaps between them, mapping out areas of possible action for businesses and administrations. The study focused on 15 Russian cities with populations of over 1 million people; the measurements were carried out in two waves: in the end of the years 2014 and 2015. The current situation in Russia is characterised by a significant difference in the economic opportunities of the capital (Moscow) and most of the other regions, whose average per capita GRP is four times less than in Moscow. Certain disparities can be observed in the penetration of digital technologies: in Moscow more than 90% of the population regularly use the Internet, while in Perm and Volgograd—just over 70%. At the same time, Russian millionaire cities completed the primary digitalization stage in 2015, reaching a penetration rate of digital infrastructure that allows expecting for manifestations of significant positive network effects and the creation of holistic multidimensional ecosystems in the digital economy. The study shows that the economic resources of the regions largely determine the development of digital supply, but have very little effect on the digital demand. The latter, however, depends to a large degree on the perceived quality of life of the region. Secondary digitalization of major Russian cities is developing very rapidly. The three leading cities stayed the same for two years —Ekaterinburg, St. Petersburg and Moscow; Kazan and Novosibirsk rank fourth and fifth, respectively, having left Perm, Krasnoyarsk, and Samara behind. Volgograd and Voronezh remained at the bottom of the rating, but they have changed places between the 2014 and 2015 waves. Rostov-on-Don is currently the most dynamically developing city. The growth of digitalization is mainly due to the growing demand, whose average index for the year has increased by almost twofold, while the supply at the end of 2015 was even slightly lower than a year earlier.