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Network Externalities and the Dynamics of Markets

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  • M. Keilbach
  • M. Posch

Abstract

The evolution of markets on which network externalities prevail can be expected to differ from "classical markets" where no such externalities exist. We suggest a flexible formal model that describes the dynamics od types of markets. This leads to a stochastic version of the well known replicator dynamics. Based on this approach we analyze the limit behavior of different market types where consumers use stochastic decision rules. We show that market shares converge to the set of equilibria with probability one, where, even under network externalities, several technologies can coexist. On the other hand, even if no network externalities prevail it is possible that only one technology stays in the market. This paper contributes to the work on generalized urn schemes and path dependent processes going on at IIASA.

Suggested Citation

  • M. Keilbach & M. Posch, 1998. "Network Externalities and the Dynamics of Markets," Working Papers ir98089, International Institute for Applied Systems Analysis.
  • Handle: RePEc:wop:iasawp:ir98089
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    References listed on IDEAS

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    1. Martin Posch, 1997. "Cycling in a stochastic learning algorithm for normal form games," Journal of Evolutionary Economics, Springer, vol. 7(2), pages 193-207.
    2. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-337, May.
    3. Church, Jeffrey & Gandal, Neil, 1993. "Complementary network externalities and technological adoption," International Journal of Industrial Organization, Elsevier, vol. 11(2), pages 239-260, June.
    4. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    5. Dosi, Giovanni & Ermoliev, Yuri & Kaniovski, Yuri, 1994. "Generalized urn schemes and technological dynamics," Journal of Mathematical Economics, Elsevier, vol. 23(1), pages 1-19, January.
    6. Arthur, W Brian, 1993. "On Designing Economic Agents That Behave Like Human Agents," Journal of Evolutionary Economics, Springer, vol. 3(1), pages 1-22, February.
    7. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-841, August.
    8. Brian Arthur, W. & Ermoliev, Yu. M. & Kaniovski, Yu. M., 1987. "Path-dependent processes and the emergence of macro-structure," European Journal of Operational Research, Elsevier, vol. 30(3), pages 294-303, June.
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    Cited by:

    1. João Leão & Vasco Santos, 2008. "New Network Goods," Working Papers Series 1 ercwp2308, ISCTE-IUL, Business Research Unit (BRU-IUL).
    2. Max Keilbach, 1999. "Network Externalities and the Path Dependence of Markets: Will Bill Gates Make It?," Computing in Economics and Finance 1999 711, Society for Computational Economics.

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