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Indirect Network Effects and Adoption Externalities

Author

Listed:
  • Jeffrey Church

    (Department of Economics, University of Calgary)

  • Neil Gandal

    (Department of Public Policy, Tel Aviv University; Centre for Economic Policy Research)

  • David Krause

    (Department of Economics, The University of Lethbridge)

Abstract

The conventional wisdom is that indirect network effects, unlike direct network effects, do not give rise to externalities. In this paper we show that under very general conditions, indirect network effects lead to adoption externalities. In particular we show that in markets where consumption benefits arise from hardware/software systems, adoption externalities will occur when there are (i) increasing returns to scale in the production of software, (ii) free-entry in software, and (iii) consumers have a preference for software variety. The private benefit of the marginal hardware purchaser is less than the social benefit since the marginal hardware purchaser does not internalize the welfare improving response of the software industry, particularly the increase in software variety, on inframarginal purchasers when the market for hardware expands.

Suggested Citation

  • Jeffrey Church & Neil Gandal & David Krause, 2003. "Indirect Network Effects and Adoption Externalities," Microeconomics 0301001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpmi:0301001
    Note: Type of Document - PDF; pages: 26
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Network Externalities; Network Effects;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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