Presence Of Network Effects Research Articles

Investigating effective competition in the Swedish freight market in the presence of network effects, using the case of road transport

The purpose of this paper is to investigate effective competition in the Swedish freight market in the presence of network effects, taking road transport as an example. This study used the extended version of Wandel’s three-layered transport system model as its research framework, on which the construction of a structural equation modeling (SEM) approach was built. Four variables were chosen, with their annual sample data drawn from Swedish official statistics: transport work to represent the integrated transport demand, length of transport infrastructure network to address the effect of infrastructure network on the integrated transport demand, energy consumption of Swedish registered trucks to address the effect of energy distribution network on the integrated transport demand, and public spending on investment and maintenance of infrastructure as a basis for investigating effective competition. We found positive effects of road infrastructure network and road energy distribution network on the integrated transport demand. Our result also shows that the public spending on investment and maintenance of infrastructure has a positive effect on the integrated transport demand through the length of infrastructure network. We argue that the Swedish road transport market is less effective when transport network effects are present, based on the definition of effective competition and our assumption. We discovered a gap in the economic literature between the concepts of effective competition and network effect within the context of freight transport, and we suggested a new category in effective competition to supplement performance, conduct, and structure categories; this new category should take into account the pre-existing conditions of network effect for existing competitors and newcomers, with its various features such as accessibility (i.e., network size), connectivity (i.e., network density), and network design and operation.

AI pricing algorithms under platform competition

AbstractPlatforms play an essential role in the modern economy. At the same time, due to advances in artificial intelligence (AI), algorithms are becoming more widely used for pricing and other business functions. Previous literature examined algorithmic pricing, but not in the context of network effects and platforms. Moreover, platform competition literature has not considered how algorithms may affect competition. We study the performance of AI pricing algorithms (Q-learning and Particle Swarm Optimization) and naïve algorithms (price-matching) under platform competition. We find that algorithms set an optimal price structure that internalizes network effects. However, no algorithm is always the best because profitability depends on the type of competing algorithms and market characteristics, such as differentiation and network effects. Additionally, algorithms learn autonomously when an equilibrium is unstable and avoid it. When algorithm adoption is an endogenous strategic decision, several algorithms can be adopted in equilibrium; we characterize the conditions for the various outcomes and show that the equilibrium and platform profits are sensitive to algorithm design changes. Overall, our research suggests that AI algorithms can be effective in the presence of network effects, and platforms are likely to adopt a variety of algorithms. Lastly, we reflect on the business value of AI and identify opportunities for future research at the intersection of AI algorithms and platforms.

Firm-level political risk and credit markets

We take advantage of a new composite measure of political risk (Hassan et al., 2019) to study the effects of firm-level political risk on private debt markets. First, we use panel data tests and exploit the redrawing of US congressional districts to uncover plausibly exogenous variation in firm-level political risk. We show that borrowers’ political risk is linked to interest rates set by lenders. Second, we test for the transmission of political risk from lenders to borrowers. We predict and find that lender-level political risk propagates to borrowers through lending relationships. Our analysis allows for endogenous matching between lenders and borrowers and indicates the presence of network effects in diffusing political risk throughout the economy. Finally, we introduce new text-based methods to analyze the distinct sources of political risk to lenders and borrowers and provide textual evidence of the transmission of political risk from lenders to borrowers.

Dog Eat Dog: Balancing Network Effects and Differentiation in a Digital Platform Merger

Network effects are often used to justify platform strategies such as acquisitions and subsidies that aggregate users to a single dominant platform. However, when users have heterogeneous preferences, a single platform may not be as effective as multiple platforms from both a strategic perspective and an antitrust perspective. We study the role of network effects and platform differentiation in the context of a merger between the two largest platforms for pet-sitting services. To obtain causal estimates of network effects, we leverage geographic variation in premerger market shares and employ a difference-in-differences approach. Our results reveal that although users of the acquiring platform benefit from the merger thanks to network effects, those of the acquired platform are comparatively worse off because their preferred option is removed. Network effects and differentiation offset each other such that at the market level, users are not substantially better off with a combined platform than with two separate platforms. These findings have strategic and regulatory implications as well as highlight the importance of platform differentiation even in the presence of network effects. This paper was accepted by Alfonso Gambardella, business strategy. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4675 .

Growing platforms within platforms: How platforms manage the adoption of complementor products in the presence of network effects?

AbstractResearch SummaryPlatform owners often use endorsements to actively manage complementor firms. We argue that the direct network effects of complementors' products play a central role in the platform management by its owner. We test our predictions using data on the Apple's promotion of apps. We find that apps with network effects are more likely to receive an award. This likelihood increases when the app is introduced by a developer with a larger market share but declines when introduced in a concentrated segment. The likelihood decreases further if the app is introduced in a concentrated segment by a developer that holds a larger market share. Further, we observe that in concentrated segments, the “challenger” developer has a higher likelihood of receiving the award relative to the leader.Managerial SummaryMany products offered through platforms have their own direct network effects. The value of the product for each user grows with the number of other consumers using the product. Many platform owners also actively manage their platforms to ensure platform growth and often use less traditional tools such as product endorsements to achieve this goal. In the context of video games listed in the iOS App Store and the Editors' Choice Awards as a form of product endorsement, we examine the tradeoffs that products with direct network effects (i.e., multiplayer video games) present to the platform owner (Apple). On the one hand, the platform owner may want to promote apps with direct network effects to help them achieve a momentum in terms of user growth. On the other hand, networked apps may become dominant in the segment with negative implications for future growth of the segment and the platform owner's profitability. We find evidence consistent with this tension and find that it critically depends on the complementor strength and market segment concentration. We also observe that in concentrated segments, the “challenger” developer has a higher likelihood of receiving the award relative to the leader.

Cryptocurrency Competition and Market Concentration in the Presence of Network Effects

When network products and services become more valuable as their userbase grows (network effects), this tendency can become a major determinant of how they compete with each other in the market and how the market is structured. Network effects are traditionally linked to high market concentration, early-mover advantages, and entry barriers, and in the market they have also been used as a valuation tool. The recent resurgence of Bitcoin has been partly attributed to network effects, too. We study the existence of network effects in six cryptocurrencies from their inception to obtain a high-level overview of the application of network effects in the cryptocurrency market. We show that, contrary to the usual implications of network effects, they do not serve to concentrate the cryptocurrency market, nor do they accord any one cryptocurrency a definitive competitive advantage, nor are they consistent enough to be reliable valuation tools. Therefore, while network effects do occur in cryptocurrency networks, they are not (yet) a defining feature of the cryptocurrency marketas a whole.

Network Interconnectivity and Entry into Platform Markets

Digital technologies have led to the emergence of many platforms in our economy today. In certain platform networks, buyers in one market purchase services from providers in many other markets, whereas in others, buyers primarily purchase services from providers within the same market. Accordingly, network interconnectivity—which measures the degree to which consumers in one market purchase services from service providers in a different market—varies across different industries. We examine how network interconnectivity affects interactions between an incumbent platform serving multiple markets and an entrant platform seeking to enter one of these markets. Our model yields several interesting results. First, even if the entrant can advertise at no cost, it still may not want to make every user in a local market aware of its service, as doing so may trigger a competitive response from the incumbent. Second, having more mobile buyers, which increases interconnectivity between markets, can reduce the incumbent’s incentive to fight and, thus, increase the entrant’s incentive to expand. Third, stronger interconnectivity between markets may or may not make the incumbent more defensible: when advertising is not costly and mobile buyers consume in both their local markets and the markets they visit, a large number of mobile buyers will increase the entrant’s profitability, thereby making it difficult for the incumbent to deter entry. However, when advertising is costly or mobile buyers only consume in the markets they travel to, a large number of mobile buyers will help the incumbent deter entry. When advertising cost is at an intermediate level, the entrant prefers a market with moderate interconnectivity between markets. Fourth, we find that even if advanced targeting technologies can enable the entrant to also advertise to mobile buyers, the entrant may choose not to do so in order to avoid triggering the incumbent’s competitive response. Finally, we find that the presence of network effects is likely to decrease the entrant’s profit. Our results offer managerial implications for platform firms and help understand their performance heterogeneity.

Professional Clubs as Platforms in Multi-Sided Markets in Times of COVID-19: The Role of Spectators and Atmosphere in Live Football

In-stadium spectators affect the emotional value and atmosphere of sport live broadcasts. Due to the COVID-19 pandemic, in Europe, the presence of in-stadium spectators, however, was suspended until further notice. Conceptualizing professional clubs as economic platforms, network effects due to the lack of in-stadium spectators may affect stakeholders’ utility. Thus, the main aims of this study are to examine the influence of missing in-stadium spectators for professional clubs by investigating network effects on (1) TV viewers’ emotional arousal and (2) TV viewers’ attention towards sponsor messages during live football broadcasts. Using a quantitative research design, a controlled lap was conducted, and broadcasts were presented to n = 26 highly involved participants. Heart rate, eye-tracking, and betting odds data served as measurements of arousal, attention, and game outcome uncertainty and were aggregated on a second-by-second basis (k = 140,400). Multilevel regression analysis showed significant differences in viewers’ arousal and attention to sponsors, contingent on the presence of in-stadium spectators and game outcome uncertainty. The presence of in-stadium spectators increased arousal, while attention towards sponsor messages decreased, depending on game outcome uncertainty. Based on the presence of network effects, implications to sustainably adapting professional football clubs’ business models based on stakeholders’ different interests can be given.

Cryptoasset Market Structure and Concentration in the Presence of Network Effects

When network products and services become more valuable as their userbase grows (network effects), this tendency can become a major determinant of how they compete with each other in the market and how the market is structured. Network effects are traditionally linked to high market concentration, early-mover advantages, and entry barriers, and in the cryptoasset market they have been used as a valuation tool too. The recent resurgence of Bitcoin has been partly attributed to network effects too. We study the existence of network effects in six cryptoassets from their inception to obtain a high-level overview of the application of network effects in the cryptoasset market. We show that contrary to the usual implications of network effects, they do not serve to concentrate the cryptoasset market, nor do they accord any one cryptoasset a definitive competitive advantage, nor are they consistent enough to be reliable valuation tools. Therefore, while network effects do occur in cryptoasset networks, they are not a defining feature of the cryptoasset market as a whole.

Successful, but not Too Much: Managing Platform Complementors in the Presence of Network Effects

Successful, but not Too Much: Managing Platform Complementors in the Presence of Network Effects

Antitrust Enforcement in the Digital Economy: US

Antitrust enforcement in digital and high-tech markets is not disconnected from traditional antitrust theory or practice. Yet, unique features of firms operating in digital and other high-tech markets can necessitate modification of doctrine. For example, modern antitrust enforcement in digital markets needs to take seriously the presence of network effects in two-sided markets and the procompetitive justifications for various kinds of product design decisions that may otherwise appear to harm competitors under older models of antitrust enforcement. The goal, however, remains enforcement of the consumer welfare standard, even if enforcers and courts must be sensitive to features particular to digital markets. This chapter takes the 2001 D.C. Circuit opinion in Microsoft as an inflection point in digital antitrust enforcement. With that case we can first clearly see all of the various threads pulled together that run through modern antitrust enforcement in high tech cases. This chapter begins with a brief overview of the precursor cases that informed enforcement up until the late 1990s before devoting attention to Microsoft and the subsequent cases that shape modern antitrust enforcement in digital markets.

Optimal versioning strategies for software firms in the competitive environment

Software-as-a-service (SaaS) is gaining tremendous popularity in the enterprise software releases, which has brought the growing challenge for the incumbent used to adopt the on-premise licensing model. In this paper, we focus on the optimal versioning strategy problem of the incumbent when he faces the competition from the entrant who releases the SaaS software. He can choose from providing the upgraded on-premise software, turning to offer the SaaS version of the software, and releasing both the versions. We indicate that releasing both versions won't be the optimal choice in the competitive environment. When the upgrade cost is above a certain value, and the gap of value is below a threshold positively linear correlated with the upgrade cost, the incumbent prefers the SaaS strategy. Otherwise, the on-premise strategy generates the highest profit. A special case is that in the medium switching cost environment, the SaaS strategy can be optimal for all possible values of upgrade cost. Finally, We consider the problem in the presence of network effect and in the uncovered market setting. The results provide effective managerial insights into the strategy selection for the incumbent.

Competition in Markets with Quality Uncertainty and Network Effects

AbstractWe study how quality uncertainty among consumers affects price competition in the presence of network effects. Our main result is that quality uncertainty has non-monotonic effects on firms’ price setting behavior. Prices and industry profit is first falling, then increasing, in quality uncertainty. In addition we show that quality uncertainty can force a high quality provider to be aggressive to the point where its price in the first period is below that of a low quality provider. We also analyse the incentives for compatibility under quality uncertainty, and find that when quality uncertainty is sufficiently high, compatibility may be used as a means of softening price competition.

Sequential product positioning on a platform in the presence of network effects

We analyze in a game-theoretic framework the sequential product positioning problem of two asymmetric firms with different quality levels on a platform when network effects present, where the negative influences of product differentiation on product compatibility are explicitly considered. We obtain closed-form solutions to the positioning problem, and reveal that whether the traditional wisdom of positioning in the mass market is still optimal for the leader in our setting depends not only on whether it has a quality advantage over the follower, but also on the intensity of the network effects. For the follower, as the network effects increase or its quality advantage increases, its product positioning approaches the mass product; otherwise, the opposite is true. We also observe that the optimal degree of differentiation has certain robustness with respect to the order of the positioning decisions. In addition, we find that the degree of product differentiation in the sequential positioning scenario is lower than in the simultaneous positioning scenario, while it is higher than in the social welfare maximization scenario. This research provides concrete guidelines for high-tech firms to make pertinent strategic decisions, and lays a foundation for platform managers to design policies to coordinate its members.

Influencing of International Accounting Reporting Standards on Quality of Financial Reports

IASB states that the main objective of financial reporting is to provide information that is useful to investors, creditors and others in making investment, credit and similar resource allocation decisions. This study sought to find out if the adoption of IFRS had affected the financial reporting quality of listed firms in Kenya. Sample selection consisted of all companies listed in the Nairobi Stock Exchange (NSE) between 1994 and 2003 excluding banking and insurance companies. The study shows that the value relevance of reported earnings was incrementally higher for listed companies during the post-IFRS convergence period than in the pre-IFRS convergence period. Keywords: IFRS, Kenya, Nairobi Securities Exchange. In a sample of 102 non-European Union countries, we study variations in the decision to adopt International Financial Reporting Standards (IFRS). There is evidence that more powerful countries are less likely to adopt IFRS, consistent with more powerful countries being less willing to surrender standard-setting authority to an international body. There is also evidence that the likelihood of IFRS adoption at first increases and then decreases in the quality of countries’ domestic governance institutions, consistent with IFRS being adopted when governments are capable of timely decision making and when the opportunity and switching cost of domestic standards are relatively low. We do not find evidence that levels of and expected changes in foreign trade and investment flows in a country affect its adoption decision: thus, we cannot confirm that IFRS lowers information costs in more globalized economies. Consistent with the presence of network effects in IFRS adoption, we find that a country is more likely to adopt IFRS if its trade partners or countries within in its geographical region are IFRS adopters.

When unionisation is profitable for firms in network industries

AbstractIn an industry characterised by the presence of network effects, this paper investigates a duopolistic game in which firms may choose whether to bargain over wages and employment with unions or to face a competitive labour market (i.e., without unions). If unions are sufficiently wage‐sensitive, it is shown that the presence of sufficiently large network effects makes unionisation the Pareto efficient sub‐game perfect Nash equilibrium outcome for firms.

Network Structures and Entry into Platform Markets

Digital technologies have led to the emergence of many platforms in our economy today. In certain platform networks, buyers in one market purchase services from providers in many other markets, whereas other platform networks may comprise local clusters in which buyers primarily purchase services from providers within the same cluster. Consequently, network interconnectivity varies across different industries. We examine how network interconnectivity affects interactions between an incumbent platform serving multiple markets and an entrant platform seeking to enter one of these markets. Our model yields several interesting results. First, even if the entrant can advertise at no cost, it still may not want to make every user in a local market aware of its service, as doing so may trigger a competitive response from the incumbent. Second, having more mobile buyers, which increases interconnectivity between markets, can reduce the incumbent’s incentive to fight and, thus, increase the entrant’s incentive to expand. Third, stronger interconnectivity between markets may or may not make the incumbent more defensible: when advertising is not costly and mobile buyers consume in both their local markets and the markets they visit, a large number of mobile buyers will increase the entrant’s profitability, thereby making it difficult for the incumbent to deter entry. However, when advertising is costly or mobile buyers only consume in the markets they travel to, a large number of mobile buyers will help the incumbent deter entry. When advertising cost is at an intermediate level, the entrant prefers a market with moderate interconnectivity between markets. Fourth, we find that even if advanced targeting technologies can enable the entrant to also advertise to mobile buyers, the entrant may choose not to do so in order to avoid triggering then incumbent’s competitive response. Finally, we find that the presence of network effects is likely to decrease the entrant’s profit. Our results offer managerial implications for platform firms and help understand their performance heterogeneity.

Understanding the equilibrium dynamics of European broadband diffusion

ABSTRACTThis study examines the equilibrium dynamics of European broadband markets within a simultaneous demand and supply model. Unlike alternative reduced-form approaches, our model explicitly incorporates key features of the demand for network services: a bell-shaped distribution of heterogeneous consumers and presence of network effects. Our empirical analysis of European countries reveals that although the demand for broadband services exhibits strong network effects they are not ‘strong enough’ to archive critical mass in these markets. Furthermore, the systems equilibrium dynamics show that even though the technology is introduced at very high prices initially, the expansion of suppliers’ infrastructure investment reduces the equilibrium prices rapidly in the first few years. This price reduction, combined with strong network effects, stimulates expansion of the subscription base until consumers at the peak of the distribution enter the market. Convergence to the steady state happens at around 8 years for service price and 15 years for subscription. Comparative static analysis illustrates that steady state equilibrium subscription relates positively to national population density, inter-platform concentration, and the share of unbundled local loop, while the equilibrium price relates inversely to these factors. Other supply and demand factors (viz. intra-platform concentration, income and education) have minimal impact on the steady state equilibrium.

Software Licensing: Pay-Per-Use versus Perpetual

Piracy has been a major problem for perpetually licensed software. Usage-based licensing architecture such as pay-per-use or software-as-a-service can offer technology-based protection against piracy. We provide an analytical framework to examine the economic implications of pay-per-use versus perpetual licensing in a market with potential piracy, network effect, and heterogeneous consumers in terms of marginal usage benefit and acquisition costs for pirated software. We show that the potential piracy rate, the user inconvenience cost of pay-per-use licensing, consumer heterogeneity, and the network strength are important factors determining a vendor’s optimal choice of licensing architecture. While perpetual licensing tends to be optimal when consumers have homogeneous valuations, pay-per-use is more profitable than perpetual licensing or mixed licensing in markets with heterogeneous consumers and low user inconvenience costs. If the inconvenience cost is low enough, pay-per-use will be more profitable than perpetual licensing even if the market has no potential piracy. The presence of network effect also favors pay-per-use over perpetual licensing; if the network effect is strong, pay-per-use will always dominate perpetual licensing regardless of the inconvenience cost or the potential piracy. With more heterogeneous consumers, higher potential piracy, lower inconvenience costs, and stronger network effects, pay-per-use licensing yields not only higher vendor profits but also a higher social surplus than perpetual licensing. Important managerial implications are also discussed.

Duopoly Pricing Strategy for Information Products with Premium Service: Free Product or Bundling?

Many software firms, especially mobile app providers, offer perpetually free basic products to users, but premiums are charged for access to the additional features or functionalities. While the free offering helps capture potential customers, it might cannibalize the sales of premium goods or services. This paper adopts a game theoretical approach to examine the impact of free offering on the competition between two firms in the presence of network effects. The firms can either offer a free core product and a paid service or offer them as a bundle. The core product has stand-alone value and can be used separately but the value-added service has no value without the core product. We derive the market equilibria and present conditions under which the free offering strategy outperforms the bundling strategy. We show that when a firm’s core product has a sufficient advantage in product quality, it is better for this firm to sell the bundle but for the other to use free strategy. However, if the core products are similar in terms of quality, it is optimal for them to use the same strategies. Whether to offer a free product depends largely on the core products’ quality. We also show that the firms may be caught in a prisoner’s dilemma when both adopt the free strategy. Finally, we find that the profitability of the firm that offers a free product always increases in network effects intensity and market size, but this is not the case for the firm that sells the bundle. This study contributes to understanding the behavior of feature-limited free offering in a duopoly setting. Our findings also provide insights into the design of free product and the impact of network effects on the firms’ offering decisions.