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Quantifying and interpreting network effects: ‘Own-network’ is not the same as ‘firm-level’

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  • Van Hove, Leo

Abstract

This note revisits existing research on network effects in the mobile telephony industry. It highlights that – defined correctly – own-network and firm-level network externalities are two different concepts, and that mixing them up leads to inaccurate interpretations. In particular, I demonstrate that the ratio of cross- to own-network effects is an imprecise measure of compatibility because it does not accurately isolate network effects that convey market power from effects that do not. As an alternative, I propose the ratio of industry- to firm-level network effects.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:iepoli:v:45:y:2018:i:c:p:47-51
    DOI: 10.1016/j.infoecopol.2018.08.002
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    References listed on IDEAS

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    1. Doganoglu, Toker & Grzybowski, Lukasz, 2007. "Estimating network effects in mobile telephony in Germany," Information Economics and Policy, Elsevier, vol. 19(1), pages 65-79, March.
    2. Brousseau,Eric & Curien,Nicolas (ed.), 2007. "Internet and Digital Economics," Cambridge Books, Cambridge University Press, number 9780521855914, January.
    3. Leo Van Hove, 2016. "Measuring the value of mobile telecommunications networks," Netnomics, Springer, vol. 17(3), pages 191-222, November.
    4. Mitsuru Sunada, 2008. "Network effects with quality change: an empirical analysis of the Japanese mobile telecommunications market, 1995-2001," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(8), pages 657-674.
    5. Grajek, Michal, 2010. "Estimating network effects and compatibility: Evidence from the Polish mobile market," Information Economics and Policy, Elsevier, vol. 22(2), pages 130-143, May.
    6. Van Hove, Leo, 2016. "Testing Metcalfe's law: Pitfalls and possibilities," Information Economics and Policy, Elsevier, vol. 37(C), pages 67-76.
    7. Stefan Behringer, 2014. "Network Effects, Spillovers and Market Structure," Manchester School, University of Manchester, vol. 82(2), pages 143-159, March.
    8. Madden, Gary G & Schipp, Michael & Tan, Joachim, 2007. "Mobile telephony and internet growth: impacts on consumer welfare," MPRA Paper 14555, University Library of Munich, Germany.
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    Keywords

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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