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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, EconWPA.
  • Handle: RePEc:wpa:wuwpmi:0301001
    Note: Type of Document - PDF; pages: 26
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    References listed on IDEAS

    as
    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
    2. Church, Jeffrey & Gandal, Neil, 1992. "Integration, Complementary Products, and Variety," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 651-675, Winter.
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    Cited by:

    1. O'Donovan, David & Rios-Morales, Ruth, 2006. "Can the Latin American and Caribbean countries emulate the Irish model on FDI attraction?," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    2. Peitz, Martin & Valletti, Tommaso, 2014. "Reassessing competition concerns in electronic communications markets," ZEW Discussion Papers 14-101, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Slivko, Olga, 2012. "Direct and indirect subsidies in markets with system goods in the presence of externalities. Preliminary version," Working Papers 2072/211631, Universitat Rovira i Virgili, Department of Economics.
    4. repec:eee:ijrema:v:33:y:2016:i:2:p:261-275 is not listed on IDEAS
    5. Dietrich, Antje-Mareike, 2017. "Platform intermediation to sponsor alternative fuel vehicles," Transport Policy, Elsevier, vol. 54(C), pages 90-99.
    6. Andrei Hagiu, 2004. "Two-Sided Platforms: Pricing and Social Efficiency," Discussion papers 04035, Research Institute of Economy, Trade and Industry (RIETI).
    7. Michal Polasik, 2015. "The Potential for Development of Mobile Payments and mPOS Usage on the Polish Market: Empirical Results (Potencjal rozwoju platnosci mobilnych i zastosowania mPOS na rynku polskim. Wyniki badan empiry," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 13(54), pages 65-84.
    8. María Fernanda Viecens, 2009. "Pricing strategies in two-sided platforms: The role of sellers’ competition," Working Papers 2009-11, FEDEA.
    9. Dietrich, Antje-Mareike, 2016. "Governmental platform intermediation to promote alternative fuel vehicles," Economics Department Working Paper Series 16, Technische Universität Braunschweig, Economics Department.
    10. Grith Skovgaard Ølykke & Peter Møllgaard, 2016. "What is a service of general economic interest?," European Journal of Law and Economics, Springer, vol. 41(1), pages 205-241, February.
    11. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, March.
    12. Simone Scholten & Ulrich Scholten, 2012. "Platform-based Innovation Management: Directing External Innovational Efforts in Platform Ecosystems," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 3(2), pages 164-184, June.
    13. repec:eee:joecas:v:6:y:2009:i:2:p:155-180 is not listed on IDEAS
    14. Dittmann Heidi & Kuchinke Björn A., 2015. "Ordnungsökonomische Aspekte der Sharing Economy / Sharing Economy and Regulation," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 66(1), pages 243-262, January.
    15. Michal Polasik & Dariusz Piotrowski, 2016. "Payment innovations in Poland: a new approach of the banking sector to introducing payment solutions," Ekonomia i Prawo, Uniwersytet Mikolaja Kopernika, vol. 15(1), pages 103-131, March.
    16. Kevin J. Boudreau & Andrei Hagiu, 2008. "Platform Rules: Multi-Sided Platforms as Regulators," Harvard Business School Working Papers 09-061, Harvard Business School.
    17. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 119-149, March.
    18. Guy Meunier & Jean-Pierre Ponssard, 2018. "Optimal Policy and Network Effects for the Deployment of Zero Emission Vehicles," CESifo Working Paper Series 7026, CESifo Group Munich.
    19. Jean Pierre Ponssard & Guy Meunier, 2018. "Optimal Policy and Network Effects for the Deployment of Zero Emission Vehicles ," CIRED Working Papers halshs-01777499, HAL.
    20. Christiaan Hogendorn, 2012. "Spillovers and Network Neutrality," Chapters,in: Regulation and the Performance of Communication and Information Networks, chapter 8 Edward Elgar Publishing.
    21. Church, Jeffrey & Gandal, Neil, 2012. "Direct and indirect network effects are equivalent: A comment on “Direct and Indirect Network Effects: Are They Equivalent?”," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 708-712.
    22. Pollock, R., 2009. "General Network Effects and Welfare," Cambridge Working Papers in Economics 0915, Faculty of Economics, University of Cambridge.
    23. Michal Polasik & Dariusz Piotrowski, 2016. "Payment innovations in Poland: the role of payment services in the strategies of commercial banksà," Ekonomia i Prawo, Uniwersytet Mikolaja Kopernika, vol. 15(1), pages 73-101, March.
    24. Dachrahn Wu & Ming Chang & Mei-Hua Chang, 2008. "Market coverage and “love of software variety” in the supporting services approach," Netnomics, Springer, vol. 9(2), pages 77-86, October.

    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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