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Network Externality: An Uncommon Tragedy

Author

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  • S. J. Liebowitz
  • Stephen E. Margolis

Abstract

Economists have defined 'network externality' and have examined putative inframarginal market failures associated with it. This paper distinguishes between network effects and network externalities, where the latter are market failures. The authors argue that while network effects are important, network externalities are theoretically fragile and empirically undocumented. Some network externalities are merely pecuniary. Network ownership or transactions among network participants can internalize some network effects. The type of market failure that has been associated with these externalities is a transition problem that has little to do with externality.

Suggested Citation

  • S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
  • Handle: RePEc:aea:jecper:v:8:y:1994:i:2:p:133-50 Note: DOI: 10.1257/jep.8.2.133
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    References listed on IDEAS

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    1. F. H. Knight, 1924. "Some Fallacies in the Interpretation of Social Cost," The Quarterly Journal of Economics, Oxford University Press, vol. 38(4), pages 582-606.
    2. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, pages 70-83.
    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. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, pages 332-337.
    5. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Alfred E. Kahn, 1988. "The Economics of Regulation: Principles and Institutions," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610523, January.
    7. Liebowitz, S J & Margolis, Stephen E, 1990. "The Fable of the Keys," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 1-25, April.
    8. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-841, August.
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    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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