3 research outputs found
Network Externalities, Mutuality, and Compatibility
Positive network externalities can arise when consumers benefit from the
consumption of compatible products by other consumers (user-positive
consumption externalities) or, alternatively, when they incur costs
from the consumption of incompatible products by other consumers
(nonuser-negative consumption externalities). But whereas user-positive
externalities are typically mutually imposed and imply mutual benefit
because they relate to interoperability, with nonuser-negative
externalities the costs of incompatibility may be imposed unilaterally
and borne asymmetrically. For example, increased risks of death and
injury on the roads due to the co-existence of large and small vehicles
are imposed exclusively by the owners of the large vehicles and borne
exclusively by the occupants of the small vehicles. This paper compares
the social optimality of incentives for compatibility under regimes
involving user-positive and nonuser-negative externalities. Earlier
work with respect to user-positive externalities (e.g., Katz and
Shapiro, 1985) suggests that firms with relatively small networks or
weak reputations tend to be biased in favor of compatibility, while
individual firms’ incentives for compatibility are suboptimal
when their networks are closely matched in size. Meanwhile, intuition
suggests that with nonuser-negative externalities incentives for
incompatibility should always be excessive, reflecting the notion that
activities involving unilaterally imposed negative externalities will
always be overprovided by the market (in the absence of regulation or
Coaseian mitigation). Using a "location" model of
differentiated products, we find that, under both regimes, incentives
for compatibility tend to be suboptimal when firms' networks are close
in size, and excessive for the small firm when the networks differ
greatly in size. Surprising public policy implications with respect to
externalities are discussed
Adverse Network Effects, Moral Hazard, and the Case of Sport-Utility Vehicles
The paper examines a class of phenomena that combine adverse network
effects with moral hazard, using the motor vehicle market as an example
to develop and illustrate the key concepts. It is hypothesized that
consumers behave as if there is a network externality with respect to
vehicle size: the more large vehicles there are on the roads, the
greater a consumer’s propensity to seek protection from them by
driving a large vehicle herself. One consequence of this is that motor
vehicle manufacturers are discouraged from making large vehicles less
hazardous to other motorists. The paper measures the network effect and
consequent moral hazard using disaggregate data on choice of vehicle
type and related household characteristics, combined with a state-level
measure of the incidence of traffic fatalities. The results show that
for each 1 million light trucks that replace cars, between 961 and 1,812
would-be car buyers decide to buy a light truck instead, in reaction to
the increased risk of death posed by the incremental light trucks. This
network effect, when run in reverse, creates egregious incentives for
vehicle manufacturers: for every life saved due to safety innovations
that make light trucks less deadly to other motorists, manufacturers can
expect to sell about 31 fewer light trucks
Adverse Network Effects, Moral Hazard, and the Case of Sport-Utility Vehicles
The paper examines a class of phenomena that combine adverse network
effects with moral hazard, using the motor vehicle market as an example
to develop and illustrate the key concepts. It is hypothesized that
consumers behave as if there is a network externality with respect to
vehicle size: the more large vehicles there are on the roads, the
greater a consumer’s propensity to seek protection from them by
driving a large vehicle herself. One consequence of this is that motor
vehicle manufacturers are discouraged from making large vehicles less
hazardous to other motorists. The paper measures the network effect and
consequent moral hazard using disaggregate data on choice of vehicle
type and related household characteristics, combined with a state-level
measure of the incidence of traffic fatalities. The results show that
for each 1 million light trucks that replace cars, between 961 and 1,812
would-be car buyers decide to buy a light truck instead, in reaction to
the increased risk of death posed by the incremental light trucks. This
network effect, when run in reverse, creates egregious incentives for
vehicle manufacturers: for every life saved due to safety innovations
that make light trucks less deadly to other motorists, manufacturers can
expect to sell about 31 fewer light trucks