Indirect Network Effects and Adoption Externalities
AbstractCan indirect network effects lead to adoption externalities? If so, when? We show that in markets where consumption benefits arise from hardware/software systems, adoption externalities will occur when there are (i) increasing returns to scale in the production of software, (ii) free entry in software, and (iii) consumers have a preference for software variety. The private benefit of the marginal hardware purchaser is less than the social benefit since the marginal hardware purchaser does not internalize the welfare improving response of the software industry, particularly the increase in software variety, on inframarginal purchasers when the market for hardware expands.
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Bibliographic InfoArticle provided by De Gruyter in its journal Review of Network Economics.
Volume (Year): 7 (2008)
Issue (Month): 3 (September)
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Web page: http://www.degruyter.com
Other versions of this item:
- Church, Jeffrey & Gandal, Neil & Krause, David, 2003. "Indirect Network Effects and Adoption Externalities," CEPR Discussion Papers 3738, C.E.P.R. Discussion Papers.
- Jeffrey Church & Neil Gandal & David Krause, 2003. "Indirect Network Effects and Adoption Externalities," Microeconomics 0301001, EconWPA.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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