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The Growth of Interorganizational Systems in the Presence of Network Externalities

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Author Info

  • Frederick J. Riggins

    (Faculty of Business, University of Alberta, Edmonton, Alberta, Canada T6G 2R6)

  • Charles H. Kriebel

    (Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Tridas Mukhopadhyay

    (Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

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    Abstract

    We develop a model of network growth in the presence of network externalities for the case where a buyer initiates an interorganizational system with its suppliers. In our two-stage model, suppliers joining the network in the first stage can gain economic benefit from increased market share or higher price for the primary product. Suppliers encounter negative externalities since the economic benefit accruing to participating suppliers is less for increasingly larger networks. In the first stage, the buyer may experience initial supplier adoption of the network followed by a "stalling" problem due to negative externalities. In order to overcome this stalling problem, the buyer may find it optimal to subsidize some suppliers' costs to join the network in the second stage. We characterize the buyer's optimal second stage subsidy policy and show the conditions under which the buyer will find it optimal to offer a subsidy. If the suppliers have some positive ex ante expectation of a second stage subsidy, the growth of the network will be retarded in the first stage resulting in suboptimal profits for the buyer.

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    File URL: http://dx.doi.org/10.1287/mnsc.40.8.984
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 40 (1994)
    Issue (Month): 8 (August)
    Pages: 984-998

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    Handle: RePEc:inm:ormnsc:v:40:y:1994:i:8:p:984-998

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    Related research

    Keywords: telecommunications network; electronic data interchange; network externalities; monopsony; optimal subsidy policies;

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    Cited by:
    1. Argenton, C. & Prüfer, J., 2011. "Search Engine Competition with Network Externalities," Discussion Paper 2011-024, Tilburg University, Tilburg Law and Economic Center.
    2. Fritz, Melanie & Hausen, Tobias, 2009. "Electronic supply network coordination in agrifood networks: Barriers, potentials, and path dependencies," International Journal of Production Economics, Elsevier, vol. 121(2), pages 441-453, October.
    3. Prosser, Alexander & Nickl, Alexander, 1997. "The impact of EDI on interorganizational integration," International Journal of Production Economics, Elsevier, vol. 52(3), pages 269-281, October.
    4. Mahajan, Jayashree & Vakharia, Asoo J., 2004. "Determining firm-level IT investments to facilitate value chain activities: Should spillovers accruing to value chain members be incorporated?," European Journal of Operational Research, Elsevier, vol. 156(3), pages 665-682, August.
    5. Oral, Muhittin & Kettani, Ossama & Cinar, Unver, 2001. "Project evaluation and selection in a network of collaboration: A consensual disaggregation multi-criterion approach," European Journal of Operational Research, Elsevier, vol. 130(2), pages 332-346, April.

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