Exploration and exploitation in the presence of network externalities

This paper examines the conditions under which exploration of a new, incompatible technologyis conducive to firm growth in the presence of network externalities. In particular, this studyis motivated bythe divergent evolutions of the PC and the workstation markets in response to a new technology: reduced instruction set computing (RISC). In the PC market, Intel has developed new microprocessors bymaintaining compatibilitywith the established architecture, whereas it was radicallyr eplaced byRISC in the workstation market. History indicates that unlike the PC market, the workstation market consisted of a large number of power users, who are less sensitive to compatibilitythan ordinaryusers. Our numerical analysis indicates that the exploration of a new, incompatible technologyis more likelyto increase the chance of firm growth when there are a substantial number of power users or when a new technologyis introduced before an established technologytakes off. (; ; ;

Dynamic R&D incentives with network externalities

This paper studies the incentives to undertake uncertain R&D initiatives in a dynamic duopoly network industry. It is shown that network externalities positively affect the incentives to invest in R&D. In the model, competition resembles a preemption race and, therefore, market performance implies an overinvestment in R&D in comparison with the social optimum. Moreover, network externalities have an important impact in the dynamic evolution of the industry. Although in the long-run a single firm dominates the market (i.e. wins the race), short-run competition is very fierce and concentrated on neck-and-neck technological configurations. This short-run competition is fiercer and longer, the higher the level of network externalities. Policy measures that increase technological diffusion (i.e. mandatory licensing), increase the level of competition and/or prolong the short-run competition have an important positive impact on consumer welfare and on firms? R&D incentives. --Network externalities,Innovation,Imperfect Competition,Dynamic Games

Indirect Network Effects in New Product Growth

Indirect network effects are of prime interest to marketers because they affect the growth and takeoff of software availability for, and hardware sales of, a new product. While prior work on indirect network effects in the economics and marketing literature is valuable, these literatures show two main shortcomings. First, empirical analysis of indirect network effects is rare. Second, in contrast to the importance the prior literature credits to the chicken-and-egg paradox in these markets, the temporal pattern – which leads which? – of indirect network effects remains unstudied. Based on empirical evidence of nine markets, this study shows, among others, that: (1) indirect network effects, as commonly operationalized by prior literature, are weaker than expected from prior literature; (2) in most markets we examined, hardware sales leads software availability, while the reverse almost never happens, contradicting existing beliefs. These findings are supported by multiple methods, such as takeoff and time series analyses, and fit with the histories of the markets we studied. The findings have important implications for academia, public policy and management practice. To academia, it identifies a need for new, and more relevant, conceptualizations of indirect network effects. To public policy, it questions the need for intervention in network markets. To management practice, it downplays the importance of the availability of a large library of software for hardware technology to be successful.Chicken-and-Egg;New Product Growth;Indirect Network Effects;Takeoff

The emerging empirics of evolutionary economic geography

Following last decade’s programmatic papers on Evolutionary Economic Geography, we report on recent empirical advances and how this empirical work can be positioned vis-à-vis other strands of research in economic geography. First, we review studies on the path dependent nature of clustering, and how the evolutionary perspective relates to that of New Economic Geography. Second, we discuss research on agglomeration externalities in Regional Science, and how Evolutionary Economic Geography contributed to this literature with the concepts of cognitive proximity and related variety. Third, we go into the role of institutions in Evolutionary Economic Geography, and we relate this to the way Institutional Economic Geography tends to view institutions. From this discussion, a number of new research challenges are derived.evolutionary economic geography, clusters, related variety, institutions

The emerging empirics of evolutionary economic geography

Following last decadeÕs programmatic papers on Evolutionary Economic Geography, we report on recent empirical advances and how this empirical work can be positioned vis-ˆ-vis other strands of research in economic geography. First, we review studies on the path dependent nature of clustering, and how the evolutionary perspective relates to that of New Economic Geography. Second, we discuss research on agglomeration externalities in Regional Science, and how Evolutionary Economic Geography contributed to this literature with the concepts of cognitive proximity and related variety. Third, we go into the role of institutions in Evolutionary Economic Geography, and we relate this to the way Institutional Economic Geography tends to view institutions. From this discussion, a number of new research challenges are derived.evolutionary economic geography, clusters, related variety, institutions, regional branching

Buying commercial law: Choice of law, choice of forum, and network externalities

Copyright @ 2009 Bryan DruzinThis paper applies network effect theory to transnational commercial law, arguing that commercial parties selecting law through choice of law and choice of forum clauses can be likened to consumers selecting a product, and thus equally susceptible to the effects of network externalities. The number of “consumers” who subscribe to the same legal norms is analogous to the number of consumers who use a product. As the number of “consumers” increases, so too does the inherent value of selecting that jurisdiction, inducing even more parties to “purchase” that body of law. This is a network effect. I argue that transnational commercial law is ideally calibrated so as to generate a network effect. This stems from the inherent nature of commerce. The discussion distinguishes between two kinds of externalities, direct and indirect network externalities, concluding that network systems that possess both kinds of network externalities (as is the case with law-selection decisions in commercial contracts), are the best candidates to produce a robust network effect. I then examine how the twin ingredients of fluid interaction and frequent choice present in commerce precipitate a network effect; expansive interaction places a higher premium on the need for synchronization, and frequent opportunities to select law in the contracts of fresh commercial relationships allow for an incremental drift towards a specific jurisdiction. The paper ultimately concludes that, as a result, network externalities indeed play an influential role in the ascension of particular jurisdictions over others in law-selection decisions, an important conclusion as it points to an unrecognized influence underpinning the current development of transnational commercial law

Competition and Irreversible Investments under Uncertainty

We examine the effect of competition on investment decisions in an industry in which each firm has a completely irreversible investment opportunity and the product market has positive externalities for a small market size and negative externalities for a large market size. In the latter case, which corresponds to the traditional competitive industries, firms invest sequentially as market profitability develops. In the former case, which corresponds to industries in which investment is mutually beneficial, firms invest simultaneously after the market's profitability has developed sufficiently to gain all network benefits and to recover the option value of waiting. These extensions of a real options analysis may help explain rapid and sudden developments such as recent Internet investment, or explain the late take-off phenomenon of prolonged start-up problems, such as the case of fax machine production.Irreversible Investments, Real Options, Network Effects

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

Network strategies for the new economy

In this paper we argue that the pace and scale of development in the information and communication technology industries (ICT) has had and continues to have major effects on the industry economics and competitive dynamics generally. We maintain that the size of changes in demand and supply conditions is forcing companies to make significant changes in the way they conceive and implement their strategies. We decompose the ICT industries into four levels, technology standards, supply chains, physical platforms, and consumer networks. The nature of these technologies and their cost characteristics coupled with higher degrees of knowledge specialisation is impelling companies to radical revisions of their attitudes towards cooperation and co-evolution with suppliers and customers. Where interdependencies between customers are particularly strong, we anticipate the possibility of winner-takes-all strategies. In these circumstances industry risks become very high and there will be significant consequences for competitive markets