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Indirect Network Effects and Adoption Externalities

Author

Listed:
  • Church Jeffrey

    () (Department of Economics, University of Calgary)

  • Gandal Neil

    (Department of Public Policy, Tel Aviv University and CEPR)

  • Krause David

    (Economic Analysis, Bell Canada)

Abstract

Can 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.

Suggested Citation

  • Church Jeffrey & Gandal Neil & Krause David, 2008. "Indirect Network Effects and Adoption Externalities," Review of Network Economics, De Gruyter, vol. 7(3), pages 1-22, September.
  • Handle: RePEc:bpj:rneart:v:7:y:2008:i:3:n:1
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    References listed on IDEAS

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    Cited by:

    1. Grith Skovgaard Ølykke & Peter Møllgaard, 2016. "What is a service of general economic interest?," European Journal of Law and Economics, Springer, vol. 41(1), pages 205-241, February.
    2. repec:eee:joecas:v:6:y:2009:i:2:p:155-180 is not listed on IDEAS
    3. Dietrich, Antje-Mareike, 2017. "Platform intermediation to sponsor alternative fuel vehicles," Transport Policy, Elsevier, vol. 54(C), pages 90-99.
    4. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978, October.
    5. Church, Jeffrey & Gandal, Neil, 2012. "Direct and indirect network effects are equivalent: A comment on “Direct and Indirect Network Effects: Are They Equivalent?”," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 708-712.
    6. Peitz, Martin & Valletti, Tommaso, 2014. "Reassessing competition concerns in electronic communications markets," ZEW Discussion Papers 14-101, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. Slivko, Olga, 2012. "Direct and indirect subsidies in markets with system goods in the presence of externalities. Preliminary version," Working Papers 2072/211631, Universitat Rovira i Virgili, Department of Economics.
    8. repec:eee:ijrema:v:33:y:2016:i:2:p:261-275 is not listed on IDEAS
    9. Michal Polasik & Dariusz Piotrowski, 2016. "Payment innovations in Poland: a new approach of the banking sector to introducing payment solutions," Ekonomia i Prawo, Uniwersytet Mikolaja Kopernika, vol. 15(1), pages 103-131, March.
    10. Michal Polasik, 2015. "The Potential for Development of Mobile Payments and mPOS Usage on the Polish Market: Empirical Results (Potencjal rozwoju platnosci mobilnych i zastosowania mPOS na rynku polskim. Wyniki badan empiry," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 13(54), pages 65-84.
    11. Pollock, R., 2009. "General Network Effects and Welfare," Cambridge Working Papers in Economics 0915, Faculty of Economics, University of Cambridge.
    12. Dachrahn Wu & Ming Chang & Mei-Hua Chang, 2008. "Market coverage and “love of software variety” in the supporting services approach," Netnomics, Springer, vol. 9(2), pages 77-86, October.
    13. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 119-149, March.
    14. Kevin J. Boudreau & Andrei Hagiu, 2008. "Platform Rules: Multi-Sided Platforms as Regulators," Harvard Business School Working Papers 09-061, Harvard Business School.
    15. Guy Meunier & Jean-Pierre Ponssard, 2018. "Optimal Policy and Network Effects for the Deployment of Zero Emission Vehicles," CESifo Working Paper Series 7026, CESifo Group Munich.
    16. Simone Scholten & Ulrich Scholten, 2012. "Platform-based Innovation Management: Directing External Innovational Efforts in Platform Ecosystems," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 3(2), pages 164-184, June.
    17. Christiaan Hogendorn, 2012. "Spillovers and Network Neutrality," Chapters,in: Regulation and the Performance of Communication and Information Networks, chapter 8 Edward Elgar Publishing.
    18. Andrei Hagiu, 2004. "Two-Sided Platforms: Pricing and Social Efficiency," Discussion papers 04035, Research Institute of Economy, Trade and Industry (RIETI).
    19. María Fernanda Viecens, 2009. "Pricing strategies in two-sided platforms: The role of sellers’ competition," Working Papers 2009-11, FEDEA.
    20. Dittmann Heidi & Kuchinke Björn A., 2015. "Ordnungsökonomische Aspekte der Sharing Economy / Sharing Economy and Regulation," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 66(1), pages 243-262, January.
    21. O'Donovan, David & Rios-Morales, Ruth, 2006. "Can the Latin American and Caribbean countries emulate the Irish model on FDI attraction?," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    22. Jean Pierre Ponssard & Guy Meunier, 2018. "Optimal Policy and Network Effects for the Deployment of Zero Emission Vehicles ," CIRED Working Papers halshs-01777499, HAL.
    23. Dietrich, Antje-Mareike, 2016. "Governmental platform intermediation to promote alternative fuel vehicles," Economics Department Working Paper Series 16, Technische Universität Braunschweig, Economics Department.
    24. Michal Polasik & Dariusz Piotrowski, 2016. "Payment innovations in Poland: the role of payment services in the strategies of commercial banksà," Ekonomia i Prawo, Uniwersytet Mikolaja Kopernika, vol. 15(1), pages 73-101, March.

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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