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Testing Metcalfe's law: Pitfalls and possibilities

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  • Van Hove, Leo

Abstract

A small but burgeoning body of literature has tried to assess whether Metcalfe's law provides a realistic yardstick for the value of specific networks. In this paper, I uncover a number of flaws in the extant tests. First, a proper test of Metcalfe's law—or of any of the competing “laws”—requires correct identification of the type(s) of network effects involved and the relevant market(s). Second, a multi-market setting typically calls for scaled network sizes. Third, controlling for intertemporal changes in network quality may be imperative. Finally, indicators at the individual and aggregate levels should not be mixed. Armed with these insights, I re-examined Madureira et al. (2013)’s results. Unlike Madureira et al., I found that Metcalfe's law fits the data better than Briscoe's law.

Suggested Citation

  • Van Hove, Leo, 2016. "Testing Metcalfe's law: Pitfalls and possibilities," Information Economics and Policy, Elsevier, vol. 37(C), pages 67-76.
    • Handle: RePEc:eee:iepoli:v:37:y:2016:i:c:p:67-76
    DOI: 10.1016/j.infoecopol.2016.09.001
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    References listed on IDEAS

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    1. Leo Hove, 2014. "Metcalfe’s law: not so wrong after all," Netnomics, Springer, vol. 15(1), pages 1-8, July.
    2. Madureira, António & den Hartog, Frank & Bouwman, Harry & Baken, Nico, 2013. "Empirical validation of Metcalfe’s law: How Internet usage patterns have changed over time," Information Economics and Policy, Elsevier, vol. 25(4), pages 246-256.
    3. Stephen Ryan & Catherine Tucker, 2012. "Heterogeneity and the dynamics of technology adoption," Quantitative Marketing and Economics (QME), Springer, vol. 10(1), pages 63-109, March.
    4. Liikanen, Jukka & Stoneman, Paul & Toivanen, Otto, 2004. "Intergenerational effects in the diffusion of new technology: the case of mobile phones," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1137-1154, November.
    5. Leo Van Hove, 2016. "Measuring the value of mobile telecommunications networks," Netnomics, Springer, vol. 17(3), pages 191-222, November.
    6. Gomez-Herrera, Estrella & Martens, Bertin & Turlea, Geomina, 2014. "The drivers and impediments for cross-border e-commerce in the EU," Information Economics and Policy, Elsevier, vol. 28(C), pages 83-96.
    7. Robin S. Lee, 2013. "Vertical Integration and Exclusivity in Platform and Two-Sided Markets," American Economic Review, American Economic Association, vol. 103(7), pages 2960-3000, December.
    8. Stremersch, S. & Tellis, G.J. & Franses, Ph.H.B.F. & Binken, J.L.G., 2007. "Indirect Network Effects in New Product Growth," ERIM Report Series Research in Management ERS-2007-019-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    9. Corts, Kenneth S. & Lederman, Mara, 2009. "Software exclusivity and the scope of indirect network effects in the U.S. home video game market," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 121-136, March.
    10. Garcia-Swartz, Daniel D. & Garcia-Vicente, Florencia, 2015. "Network effects on the iPhone platform: An empirical examination," Telecommunications Policy, Elsevier, vol. 39(10), pages 877-895.
    11. Sobolewski, Maciej & Czajkowski, MikoŁaj, 2012. "Network effects and preference heterogeneity in the case of mobile telecommunications markets," Telecommunications Policy, Elsevier, vol. 36(3), pages 197-211.
    12. Yong Liu & Enping Mai & Jun Yang, 2015. "Network externalities in online video games: an empirical analysis utilizing online product ratings," Marketing Letters, Springer, vol. 26(4), pages 679-690, December.
    13. Steiner, Michael & Wiegand, Nico & Eggert, Andreas & Backhaus, Klaus, 2016. "Platform adoption in system markets: The roles of preference heterogeneity and consumer expectations," International Journal of Research in Marketing, Elsevier, vol. 33(2), pages 276-296.
    14. Karacuka, Mehmet & Çatık, A. Nazif & Haucap, Justus, 2013. "Consumer choice and local network effects in mobile telecommunications in Turkey," Telecommunications Policy, Elsevier, vol. 37(4), pages 334-344.
    15. António Madureira & Nico Baken & Harry Bouwman, 2011. "Value of digital information networks: a holonic framework," Netnomics, Springer, vol. 12(1), pages 1-30, April.
    16. A. Madureira & F. Hartog & N. Baken, 2016. "A holonic framework to understand and apply information processes in evolutionary economics: survey and proposal," Netnomics, Springer, vol. 17(2), pages 157-190, September.
    17. Hiroshi Ohashi, 2003. "The Role of Network Effects in the US VCR Market, 1978–1986," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(4), pages 447-494, December.
    18. Kevin J. Boudreau & Lars B. Jeppesen, 2015. "Unpaid crowd complementors: The platform network effect mirage," Strategic Management Journal, Wiley Blackwell, vol. 36(12), pages 1761-1777, December.
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    Cited by:

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    2. Arturas Sabalionis & Wenbo Wang & Hail Park, 2021. "What affects the price movements in Bitcoin and Ethereum?," Manchester School, University of Manchester, vol. 89(1), pages 102-127, January.
    3. Garcia-Swartz, Daniel D. & Muhamedagić, Mensur & Saenz, Diana, 2019. "The role of prices and network effects in the growth of the iPhone platform," Technological Forecasting and Social Change, Elsevier, vol. 147(C), pages 110-122.
    4. Van Hove, Leo, 2017. "A note on “Cooperative interconnection settlement among ISPs through NAP”," European Journal of Operational Research, Elsevier, vol. 261(2), pages 800-802.
    5. Matteo Cinelli & Giovanna Ferraro & Antonio Iovanella, 2022. "Connections matter: a proxy measure for evaluating network membership with an application to the Seventh Research Framework Programme," Scientometrics, Springer;Akadémiai Kiadó, vol. 127(7), pages 3959-3976, July.
    6. Hemang Subramanian & Sabyasachi Mitra & Sam Ransbotham, 2021. "Capturing Value in Platform Business Models That Rely on User-Generated Content," Organization Science, INFORMS, vol. 32(3), pages 804-823, May.
    7. Jacopo Arpetti & Antonio Iovanella, 2020. "Towards more effective consumer steering via network analysis," European Journal of Law and Economics, Springer, vol. 50(3), pages 359-380, December.
    8. Van Hove, Leo, 2018. "Quantifying and interpreting network effects: ‘Own-network’ is not the same as ‘firm-level’," Information Economics and Policy, Elsevier, vol. 45(C), pages 47-51.

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    More about this item

    Keywords

    Metcalfe's law; Network value; Network effects; Digital information networks; Internet;
    All these keywords.

    JEL classification:

    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • D2 - Microeconomics - - Production and Organizations
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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