Electronic money and the network externalities theory: lessons for real life
The aim of this paper is to show that the network externalities theory provides a useful framework to analyse the introduction and further development of the new electronic payment instruments currently being launched. To that end the paper presents a pragmatic (and selective) reading of the network externalities literature; i.e., it screens the literature in search of both theoretical insights and empirical results which can be transposed to the case of electronic payment instruments. In so doing, the paper concentrates on the so-called electronic money products and, especially, on electronic purses. Specifically the paper shows that the network externalities literature provides a number of useful insights concerning consumer reactions to the introduction of electronic purses (and the ways in which card issuers can anticipate these reactions) and concerning the strategies card issuers may follow in a competitive market with incompatible electronic purses. All this is substantiated by multiple references to real-life situations. The first section of the paper defines the concept of network externalities. The third section demonstrates that payment cards in general are indeed network goods. It also points out which kind(s) of network effects apply to the electronic purses currently available. The paper then goes on to answer five questions in depth. Firstly, what can we learn from the network externalities literature as far as the ‘chicken-and-egg’ problem is concerned? — the problem being: merchants will not invest in terminals without a sufficient number of potential users, while the general public will not use electronic purses unless there is sufficient acceptance. Secondly, is there room for more than one incompatible electronic purse, or is the electronic purse market prone to ‘tipping’ and ‘lock-in’? Thirdly, can an electronic purse issuer gain a (decisive) first-mover advantage by entering the market before others do? Fourthly, under which conditions will card issuers be inclined to make their electronic purses compatible? And finally, what is the optimum pricing strategy for an electronic purse issuer? Copyright Kluwer Academic Publishers 1999
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
When requesting a correction, please mention this item's handle: RePEc:kap:netnom:v:1:y:1999:i:2:p:137-171. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.