Presence Of Network Effects Research Articles

A Coevolution Model of Network Structure and User Behavior: The Case of Content Generation in Online Social Networks

With the rapid growth of online social network sites (SNSs), it has become imperative for platform owners and online marketers to quantify what factors drive content production on these platforms. Previous research identified challenges in modeling these factors statistically using observational data, where the key difficulty is the inability of conventional methods to disentangle the effects of network formation and network influence on content generation from the subsequent feedback effect of newly generated content on network structure. In this paper, we adopt and enhance an actor-oriented continuous-time statistical model that enables the joint estimation of the coevolution of the users’ social network structure and of the amount of content they produce, using a Markov chain Monte Carlo–based simulation approach. Specifically, we offer a method to analyze nonstationary and continuous-time behavioral data, typically recorded in social media ecosystems, in the presence of network effects and other observable and unobservable user-specific covariates. The proposed method can help disentangle network effects of interest from feedback effects on the network. We apply our model to social network and public posting data over six months to find that (1) users tend to connect with others that have similar posting behavior; (2) however, after doing so, these users tend to diverge in their posting behavior, and (3) peer influence effects are sensitive to the strength of the posting behavior. More broadly, the proposed method provides researchers and practitioners with a statistically rigorous approach to analyze network effects in observational data. Our results lead to insights and recommendations for SNS platform owners on how to sustain an active and viable community.The online appendix is available at https://doi.org/10.1287/isre.2018.0790 .

Specialization and Competition in the Venture Capital Industry

An important type of product differentiation in the venture capital (VC) market is industry specialization. We estimate a market structure model to assess competition among VCs—some of which specialize in a particular industry and others of which are generalists—and find that the incremental effect of additional same-type competitors increases as the number of same-type competitors increases. Furthermore, we find that the effects of generalist VCs on specialists are substantial, and larger than the effect of same-type competitors. Estimates from other industries typically show the incremental effects falling as the number of same-type competitors increases and the effects of same-type competitors as always being larger than the effects of different-type competitors. Consistent with the presence of network effects that soften competition, these patterns are more pronounced in markets that exhibit dense organizational networks among incumbent VCs. Markets with sparser incumbent networks, by contrast, exhibit competitive patterns that resemble those of other, non-networked industries.

On Price Elasticities in the Presence of Network Effects

Price elasticities characterize the effect of price changes on demands in a multi-product context. We demonstrate and explain two perverse properties concerning price elasticities in the presence of network effects when three or more substitutable products are involved: Cross-price elasticities are not necessarily positive, and own-price elasticities are not necessarily negative. These findings imply that the consequences of firms' price moves in a competitive market when network effects are in play deserve further scrutiny.

New Firm Entry in the Presence of Network Effects

We show that in the presence of network effects, the effect of new firm entry on the equilibrium prices and demands of incumbent firms is not clear. In contrast to conventional thinking, we find that incumbent firms could use a higher price, have a larger demand, and earn a higher profit in the new Nash equilibrium. These perverse results arise from the fact that in the event of new firm entry, network effects can create unbalanced demand transfers between incumbent firms, and some incumbent firms can actually benefit from new entry.

Examining the U.S. Labor Market Performance of Immigrant Workers in the Presence of Network Effects

Networks are thought to have an important impact on individuals’ access to labor markets. Yet, it is a challenging task to identify network effects because the functioning of networks relies heavily on unobservables that may be correlated with other productivity-related characteristics. In this study, we quantify the importance of networks as a determinant of workers’ labor market outcomes. Using variation in the distance to the nearest Mexican rail lines in the past as a source of identification, we find that the size of the network is positively related to current wages and to the probability of being a documented immigrant.

Sequential Selling and Information Dissemination in the Presence of Network Effects

In this paper, we examine how a seller sells a product/service with a positive consumption externality, and customers are uncertain about the product's/service's value. Because early adopters learn this value, we consider the customers' intrinsic signaling incentives and positive feedback effects. Anticipating this, the seller commits to provide price discounts to the followers, and charges the leader a high price. Thus, the profit-maximizing pricing features the cream skimming strategy. We also show that the lack of seller's commitment is detrimental to the social welfare; nonetheless, the sequential selling still boosts up the seller's profit. Embedding a physical network with arbitrary payoff externality among customers, we investigate the optimal targeting strategy in the presence of information asymmetry. We provide precise indices for this leader selection problem. For undirected graphs, we should simply choose the player with the highest degree, irrespective of the seller's commitment power. Going beyond this family of networks, in general the seller's commitment power affects the optimal targeting strategy.

Complementary Online Services in Competitive Markets: Maintaining Profitability in the Presence of Network Effects

A growing number of firms are strategically utilizing information technology and the Internet to provide online services to consumers who buy their products. Online services differ from traditional services because they often promote interactivity among users and exhibit positive network effects. While the service increases the value obtained by consumers, network effects are known to intensify price competition and thus may reduce firms' profits. In this paper, we model the competition between two firms that sell a differentiated product when each firm can offer a complementary online service to its customers. We derive the market equilibrium and determine how firms should adjust their strategies to account for network effects. We find that when the service exhibits network effects, a firm's decision whether or not to offer the service depends on both the competitor's decision and the competitor's service quality. When the service does not exhibit network effects, this is not the case. In addition, we show that a firm can benefit from the technological ability to offer the service, and from an increase in the strength of network effects or in the market size of the service, only when the value customers derive from the direct functionalities (those that do not rely on the network) of the service are sufficiently high. As a result, a firm's investment in the direct functionalities of its service increases with the strength of network effects of the service as long as the marginal development cost is not too high. Finally, we show that inefficiencies in terms of the number of firms offering the service as well as the total number of service users may prevail.

Optimal Sales Schemes for Network Goods

This paper considers a monopolist’s product-launch strategy in the presence of network effects, focusing on how to exploit these effects to the maximum possible extent. In our formal framework, the firm sets a price for its product and chooses a sales scheme, which effectively determines how consumers can learn from each other about the product’s popularity. Our results on the profitability of different schemes provide insights on a variety of managerial issues that are of practical relevance for product launch. Specifically, to best exploit network effects, our results suggest releasing preorder and sales information to consumers. They also suggest taking a sequential approach to multimarket product launch, launching first in smaller markets before larger ones. Moreover, they identify possible benefits of promoting prerelease consumer communication, and they support the idea of targeting independent-minded consumers, so they can serve as opinion leaders for those who follow. This paper was accepted by Juanjuan Zhang, marketing.

Minsky Financial Instability, Interscale Feedback, Percolation and Marshall–Walras Disequilibrium

We study analytically and numerically Minsky instability as a combination of top-down, bottom-up and peer-to-peer positive feedback loops. The peer-to-peer interactions are represented by the links of a network formed by the connections between firms, contagion leading to avalanches and percolation phase transitions propagating across these links. The global parameter in the top-bottom, bottom-up feedback loop is the interest rate. Before the Minsky moment, in the Minsky Loans Accelerator stage, the relevant bottom parameter representing the individual firms micro-states is the quantity of loans. After the Minsky moment, in the Minsky Crisis Accelerator stage, the relevant bottom parameters are the number of ponzi units / quantity of failures, defaults. We represent the top-bottom, bottom-up interactions on a plot similar to the Marshal-Walras diagram for quantity-price market equilibrium (where the interest rate is the analog of the price). The Minsky instability is then simply emerging as a consequence of the fixed point (the intersection of the supply and demand curves) being unstable (repulsive). In the presence of network effects, one obtains more than one fixed point and a few dynamic regimes (phases). We describe them and their implications for understanding, predicting and steering economic instability.

Social Welfare under Quantity Competition and Price Competition in a Mixed Duopoly with Network Effects: An Analysis

In their recent work, Matsumura and Ogawa (2012) showed that in the context of a mixed duopoly, equilibrium social welfare is higher in price-setting competition than in quantity-setting competition. We found that when the strength of network effects is sufficiently high, the above result is totally reversed; thus, in a mixed duopoly, the presence of network effects weakens the superiority of price-setting competition with respect to equilibrium social welfare.

Production Mode Choice and Price Competition in the Presence of Network Effects: Shrink-Wrap via Cloud Service

We investigate how firms facing different production modes of software service determine their production mode and pricing decisions in the presence of network effects. We develop a two-stage game model to examine the network effect on the choices of production mode and the strategic behavior of the firms. We find that if all firms adopt cloud service production mode, the resulting software price is higher than if they adopt shrink-wrapped production mode. We also find that network effects lower the level of market price.

Production Mode Choice and Price Competition in the Presence of Network Effects: Shrink-Wrap via Cloud Service

We investigate how firms facing different production modes of software service determine their production mode and pricing decisions in the presence of network effects. We develop a two-stage game model to examine the network effect on the choices of production mode and the strategic behavior of the firms. We find that if all firms adopt cloud service production mode, the resulting software price is higher than if they adopt shrink-wrapped production mode. We also find that network effects lower the level of market price.

Market Entry in the Presence of Network Effects

This research holds that extant theory on real options has several limitations with regard to strategic initiatives in markets influenced by network effects. In addressing these limitations, the authors argue that markets with strong network effects tend to enhance both growth and deferral options. Furthermore, the extent to which growth and deferral options affect market entry in these settings is conditioned by both the strength of network effects (i.e., network intensity) and the presence of a dominant design in the market. Implications for real options theory in the context of network effects and for firms considering entry into markets influenced by network effects are offered and discussed.

Specialization and Competition in the Venture Capital Industry

An important type of product differentiation in the VC market is industry specialization. We estimate a market structure model to assess competition among differentiated participants in the venture capital (VC) industry. The impacts of competitor presence on profits appear markedly different than in other industries with differentiated competitors. Consistent with the presence of network effects that soften competition, these patterns are concentrated in markets that exhibit dense organizational networks among incumbent VC firms. Markets with sparser incumbent firm networks, by contrast, exhibit competitive patterns that resemble those of other, non-networked industries.

A NOTE ON DURABLE GOODS MONOPOLISTS: COMMITMENT TO FORWARD COMPATIBILITY

This note re-examines the previous results on durable goods monopolists under the time inconsistency problem that the firm tends to make its goods less compatible as a “planned obsolescence” strategy in the presence of network effects. We find that the possibility of the commitment to forward compatibility is profitable to the monopolist, depending upon the degree of technological progress and network effects. Therefore, contractual commitments that are frequently feasible and observed in real-world markets make the society better off.

Will Consumers Be Willing to Pay More When Your Competitors Adopt Your Technology? The Impacts of the Supporting-Firm Base in Markets with Network Effects

Network effects and standards competition introduce significant uncertainty into consumers’ new-product adoption decisions, creating a substantial challenge to the success of innovating firms. While the literature has highlighted the importance of establishing a large installed-user base (the number of users adopting the same product) in such markets, this paper draws attention to a different but potentially important market force: the supporting-firm base, which we define as the number of firms supporting the same technological standard. We propose a set of hypotheses concerning the impact of the supporting-firm base on consumers’ product valuation in the presence of network effects and standards competition. Our empirical analyses of disk drive markets show that, (1) Consumer product valuation is positively affected not only by the installed-user base but also by the supporting-firm base; (2) The two positive effects cannot be substituted, rather, the effort in building either would be less effective unless accompanied by the other; and (3) The impact of the supporting-firm base depends on not only its size but also the characteristics of the supporting-firms: consumers are affected more (a) by firms exclusively supporting a single standard than by firms supporting multiple standards, and (b) by incumbents than by new entrants.

Network Effects, Income and Piracy

This study builds a model which explains how income differences among countries affect differences of software piracy rate in the presence of network effects. For the model analysis, critical mass and maximum sustainable price, which indicate respectively the quantity demanded and the price at the maximum of the inverted U-shape demand curve of network good, are employed. First, we investigate income effect on the demand curve of the network good using comparative static analysis. As a result, a country which has a higher maximum income level has a higher critical mass and higher maximum sustainable price. Second, we examine how critical mass is affected by piracy. Our preliminary analysis indicates that higher piracy rates lead to smaller levels of critical mass and higher sustainable prices. Hence, allowing some level of piracy may help network goods survive in developing countries.

Dynamic output feedback control for uncertain networked control systems with random network-induced delays

This paper investigates the stabilization problem for a class of uncertain networked control systems (NCSs) with random communication network-induced delays. A dynamic output feedback controller is designed for the uncertain NCSs in the presence of network effects, i.e., network-induced delays and packet dropouts in both the sensor-controller and controller-actuator channels. Based on the Lyapunov-Razumikhin method, the existence of such controller is given in terms of the solvability of bilinear matrix inequalities. An iterative algorithm is proposed to change this non-convex problem into quasi-convex optimization problems, which can be solved effectively by available mathematical tools. The effectiveness of the proposed design methodology is verified by a numerical example.

Why do Countries Adopt International Financial Reporting Standards?

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.

Nonlinear Income Inequality Effect on Software Piracy

s We examine the relationship between income inequality and software piracy rates in the presence of network effects. By the constructions of a theoretical framework, we are able to explain the relationship between income distributions and software piracy rates. Our research suggests that the proportion of the population having the positive net benefit of using pirated software increases with income inequality at a diminishing rate, and then eventually decreases. We provide empirical evidence for this inverted U-shaped relationship between income inequality and software piracy rates, while controlling for country-level income, judicial efficiency, individualism and the proportion of fixed broadband subscribers. Our theoretical and empirical results imply that lax anti-piracy policies would make software producers better off (i.e., higher software sales because of network effects) in countries whose income inequality is moderate, but worse off in countries whose income inequality is severe. Therefore, the anti-piracy government's policy and software company's strategy should be deliberately designed considering the non-linear effects of income inequality.