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Direct and Indirect Network Effects are Equivalent: A Comment on “Direct and Indirect Network Effects: Are They Equivalent?”

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  • Church, Jeffrey
  • Gandal, Neil

Abstract

Clements (2004) makes the following two claims: (i) unlike direct network effects, increases in the size of the market do not, in the case of indirect network effects, make standardization more likely, but (ii) indirect network effects are associated with excessive standardization. We show in Clements’ framework that neither of these results are correct: standardization is more likely as the number of software firms increases and when the type of market equilibrium is unique— there are only multiple networks or only standardization—there is never excessive standardization, but there could be insufficient standardization, just as is the case with direct network effects.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9097.

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Date of creation: Aug 2012
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Handle: RePEc:cpr:ceprdp:9097

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Keywords: network effects; standardization;

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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  2. Jeffrey Church & Neil Gandal & David Krause, 2003. "Indirect Network Effects and Adoption Externalities," Microeconomics 0301001, EconWPA.
  3. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  4. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 633-645, May.
  5. Farrell, Joseph & Saloner, Garth, 1986. "Standardization and variety," Economics Letters, Elsevier, vol. 20(1), pages 71-74.
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