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Network externality and incentive to invest in network security

  • Liao, Chun-Hsiung
  • Chen, Chun-Wei
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    Breaches of network security can result in substantial losses for businesses. A game theory-based model is developed to investigate in the short run how network externality influences the optimal strategy of competing online firms producing homogenous services to invest in NS. A firm's self-protect rate and survival probability against NS security incidents differ depending on its related investment decisions. The incentive of a firm to invest in NS is derived, and the impact of the survival probability and the effect of the number of firms investing in NS on a firm's incentive to invest in NS are also analyzed. Policy implications drawn from the study are provided at the end the work.

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    File URL: http://www.sciencedirect.com/science/article/pii/S026499931300432X
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    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 36 (2014)
    Issue (Month): C ()
    Pages: 398-404

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    Handle: RePEc:eee:ecmode:v:36:y:2014:i:c:p:398-404
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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    1. Jonathan Coppel, 2000. "E-Commerce: Impacts and Policy Challenges," OECD Economics Department Working Papers 252, OECD Publishing.
    2. Alfredo Garcia & Barry Horowitz, 2007. "The potential for underinvestment in internet security: implications for regulatory policy," Journal of Regulatory Economics, Springer, vol. 31(1), pages 37-55, February.
    3. Kunreuther, Howard & Heal, Geoffrey, 2003. " Interdependent Security," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 231-49, March-May.
    4. Derrick Huang, C. & Hu, Qing & Behara, Ravi S., 2008. "An economic analysis of the optimal information security investment in the case of a risk-averse firm," International Journal of Production Economics, Elsevier, vol. 114(2), pages 793-804, August.
    5. Tanaka, Hideyuki & Matsuura, Kanta & Sudoh, Osamu, 2005. "Vulnerability and information security investment: An empirical analysis of e-local government in Japan," Journal of Accounting and Public Policy, Elsevier, vol. 24(1), pages 37-59.
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