Network Externalities and Critical Mass in the Mobile Telephone Network: a Panel Data Estimation

This paper develops a simple demand model with network externalities which allow us to identify the shape of the network externalities function in the mobile telephone market and to estimate the critical mass. If the mobile telephone network exhibits positive network externalities, we expect that the demand curve is not downward sloping everywhere but it has an increasing part, the critical mass of the installed base of subscribers. Once the critical mass is reached, the growth of the network is self-sustaining. We use a panel data of the 30 OEDC Countries from 1989 to 2006 for estimating the relationship between price of 3-minute cellular call and the installed base of subscribers; we find strong network externalities effects in mobile telephone market which drive the demand curve for this network good to be an inverted U function. Moreover, given that the concavity of the demand curve depends on the extent of network externalities, the idea is to identify some variables which could affect the intensity of network effects in the mobile telephone market, because the more concave the demand curve is, sooner the critical mass is reached for any price. This may have important implications for producers in terms of initial investment and marketing strategies which they have to do to attain the critical mass.Network Externalities, Mobile Telecommunication, Critical Mass

Pricing in Social Networks with Negative Externalities

We study the problems of pricing an indivisible product to consumers who are embedded in a given social network. The goal is to maximize the revenue of the seller. We assume impatient consumers who buy the product as soon as the seller posts a price not greater than their values of the product. The product's value for a consumer is determined by two factors: a fixed consumer-specified intrinsic value and a variable externality that is exerted from the consumer's neighbors in a linear way. We study the scenario of negative externalities, which captures many interesting situations, but is much less understood in comparison with its positive externality counterpart. We assume complete information about the network, consumers' intrinsic values, and the negative externalities. The maximum revenue is in general achieved by iterative pricing, which offers impatient consumers a sequence of prices over time. We prove that it is NP-hard to find an optimal iterative pricing, even for unweighted tree networks with uniform intrinsic values. Complementary to the hardness result, we design a 2-approximation algorithm for finding iterative pricing in general weighted networks with (possibly) nonuniform intrinsic values. We show that, as an approximation to optimal iterative pricing, single pricing can work rather well for many interesting cases, but theoretically it can behave arbitrarily bad

Incentive Systems in Multi-Level Markets for Virtual Goods

As an alternative to rigid DRM measures, ways of marketing virtual goods through multi-level or networked marketing have raised some interest. This report is a first approach to multi-level markets for virtual goods from the viewpoint of theoretical economy. A generic, kinematic model for the monetary flow in multi-level markets, which quantitatively describes the incentives that buyers receive through resales revenues, is devised. Building on it, the competition of goods is examined in a dynamical, utility-theoretic model enabling, in particular, a treatment of the free-rider problem. The most important implications for the design of multi-level market mechanisms for virtual goods, or multi-level incentive management systems, are outlined.Comment: 18 pages, 5 figures; graphics with reduced resolution. Full resolution available on author's homepage. Accepted contribution to the Workshop 'Virtual Goods' at the Conference AXMEDIS 2005, 30. November - 2. December, Florence, Ital

Identification of Network Externalities in Markets for Non-Durables

This paper introduces a structural econometric model of consumer demand for non-durable goods, which exhibits network externalities. The structural model allows us to identify the parameters, which determine the strength of the externalities in the underlying economic model from the empirical estimation results. The estimates of these parameters can then be employed to test the economic significance of the externalities and the compatibility of networks. The identifying assumption that drives our results is that consumers care about the lagged instead of the current network size. We argue that it does not necessarily bound their rationality. To complete our structural model, we provide an example of functional specification that yields a simple linear stochastic model of demand. Using this functional specification, we identify all structural parameters of the model. In the end, the estimation and the stochastic structure of the resulting econometric model are discussed. ZUSAMMENFASSUNG - ( Identifikation der Netzwerkeffekten in den Märkten für nicht-dauerhafte Güter) Der vorliegende Beitrag stellt ein strukturelles ökonometrisches Modell der Konsumnachfrage für nicht-dauerhafte Güter mit externen Netzwerkeffekten vor. Das strukturelle Modell lässt uns die Parameter von Netzwerkeffekten im zugrunde liegenden ökonomischen Modell empirisch zu identifizieren. Die Schätzer der Strukturparameter könnten für das Testen der Netzwerkkompatibilität und der ökonomischen Signifikanz der Netzwerkeffekte verwendet werden. Für die Identifikation nehmen wir an, dass die Konsumenten die Netzwerksgröße verzögert wahrnehmen. Wir argumentieren, dass diese Annahme nicht notwendigerweise mit irrationalem Verhalten gleichzusetzen ist. Um das strukturelle Modell zu vollständigen, geben wir eine funktionale Spezifikation, aus der ein lineares stochastisches Nachfragemodell folgt. Unter Verwendung dieser Spezifikation sind alle Strukturparameter von dem Modell identifiziert. Zum Schluss diskutieren wir die Schätzung und die stochastische Struktur des sich ergebenden ökonometrischen Modells.Structural Econometric Model, Network Externalities, Innovation Diffusion

Estimation of network externalities and critical mass in the mobile telephone market: a panel data analysis of the OECD countries

Network Externalities, Mobile Telecommunication, Critical Mass

Technological diffusion, welfare and growth: technological succession in the presence of network externalities

The paper examines the conditions under which technological successions can occur in the presence ofnetwork externalities. A multi-agent model is developed in which the product designs offered by firmsco-evolve with consumer preferences. Firms compete though product innovation. The modelincorporates a modified genetic algorithm (GA) in which imitation is conducted via a process ofselective transfer (a one-way crossover) and internal R&D is conducted via selective mutation.Following an initial period in which old technology firms develop their designs and networkexternalities accrue, a technological shock occurs in which new technology-based firms enter themarket. The findings of the model indicate that a necessary condition for a technological successionare the existence of at least one consumer group that champions the new technology, developing newpreferences for its characteristics. Further, the introduction of novel characteristics are have a greaterbearing on the probability of a succession than incremental gains in characteristics offered by the oldtechnology. Third, the analysis identifies an inverse relationship between time the probability of atechnological succession.economics of technology ;

Piracy of Digital Products: A Critical Review of the Economics Literature

Digital products have the property that they can be copied almost costlessly. This makes them candidates for non-commercial copying by final consumers. Because the copy of a copy typically does not deteriorate in quality, copying products can become a wide-spread phenomenon – this can be illustrated by the surge of file-sharing networks. In this paper we provide a critical overview of the literature that addresses the economic consequences of end-user copying. We conclude that some models with network effects are well-suited for the analysis of software copying while other models incorporating the feature that copies provide information about the originals may be useful for the analysis of digital music copying.information good, piracy, copyright, internet, peer-to-peer, software, music

Innovation and Diffusion

The contribution made by innovation and new technologies to economic growth and welfare is largely determined by the rate and manner by which innovations diffuse throughout the relevant population, but this topic has been a somewhat neglected one in the economics of innovation. This chapter, written for a handbook on innovation, provides a historical and comparative perspective on diffusion that looks at the broad determinants of diffusion, economic, social, and institutional, viewed from a microeconomic perspective. A framework for thinking about these determinants is presented along with a brief nontechnical review of modeling strategies used in different social scientific literatures. It concludes with a discussion of gaps in our understanding and potential future research questions.

The Evolution of Shopping Center Research: A Review and Analysis

Retail research has evolved over the past sixty years. Christaller\u27s early work on central place theory, with its simplistic combination of range and threshold has been advanced to include complex consumer shopping patterns and retailer behavior in agglomerated retail centers. Hotelling\u27s seminal research on competition in a spatial duopoly has been realized in the form of comparison shopping in regional shopping centers. The research that has followed Christaller and Hoteling has been as wide as it has been deep, including literature in geography, economics, finance, marketing, and real estate. In combination, the many extensions of central place theory and retail agglomeration economics have clearly enhanced the understanding of both retailer and consumer behavior. In addition to these two broad areas of shopping center research, two more narrowly focused areas of research have emerged. The most recent focus in the literature has been on the positive effects large anchor tenants have on smaller non-anchor tenant sales. These positive effects are referred to as retail demand externalities. Exploring the theoretical basis for the valuation of shopping centers has been another area of interest to researchers. The primary focus of this literature is based in the valuation of current and expected lease contracts

Network industries in the new economy

In this paper we discuss two propositions: the supply and demand of knowledge, and network externalities. We outline the characteristics that distinguish knowledge- intensive industries from the general run of manufacturing and service businesses. Knowledge intensity and knowledge specialisation has developed as markets and globalisation have grown, leading to progressive incentives to outsource and for industries to deconstruct. The outcome has been more intensive competition. The paper looks at what is potentially the most powerful economic mechanism: positive feedback, alternatively known as demand-side increasing returns, network effects, or network externalities. We present alternative demand curves that incorporate positive feedback and discuss their potential economic and strategic consequences. We argue that knowledge supply and demand, and the dynamics of network externalities create new situations for our traditional industrial economy such that new types of economies of scale are emerging and "winner takes all" strategies are having more influence. This is the first of a pair of papers. A second paper will take the argument further and look at the nature of firms' strategies in the new world, arguing that technology standards, technical platforms, consumer networks, and supply chain strategies are making a significant contribution to relevant strategies within the new economy