network externalities technological progress and the competition of market contracts abstract network externalities are used to describe the fact that many modern products become more valuable the more users adopt products of the same technology where network externalities and technological progress exist the various kinds of inefficiencies discussed in the recent literature can be explained by different types of contracts the main categories analysed are simple market contracts update contracts and service contracts it is shown that these types of contract emerge endogenously from the incentive structure of profit maximizing firms competition between these contracts may substantially reduce inefficient allocations caused by network externalities

tipping and concentration in markets with indirect network effects this paper develops a framework for measuring tipping the increase in a firm s market share dominance caused by indirect network effects our measure compares the expected concentration in a market to the hypothetical expected concentration that would arise in the absence of indirect network effects in practice this measure requires a model that can predict the counterfactual market concentration under different parameter values capturing the strength of indirect network effects we build such a model for the case of dynamic standards competition in a market characterized by the classic hardware software paradigm to demonstrate its applicability we calibrate it using demand estimates and other data from the 32 64 bit generation of video game consoles a canonical example of standards competition with indirect network effects in our example we find that indirect network effects can lead to a strong economically significant increase in market concentration we also find important roles for beliefs on both the demand side as consumers tend to pick the product they expect to win the standards war and on the supply side as firms engage in penetration pricing to invest in growing their networks

in search of insights into the generation of techno economic trends micro and macro constituencies in the microprocessor industry abstract in the field of technology policy few challenges are more intriguing than understanding the nature of technical and market trends this paper deals with this problem by using the sociotechnical constituencies approach in order to integrate the treatment of micro macro issues from product to industry the case study is that of the microprocessor industry where at present a risc reduced instruction set computer technology is emerging in a field where a powerful and far from exhausted cisc complex instruction set computer technology tends to occupy almost every segment of the market the analysis reveals how emerging product constituencies do implement pro active trend creating strategies in order to establish themselves as industrial trends and by so doing they simultaneously re define the existing content of the macro industrial level the study also reveals the important role of the nature and maturity of microprocessor technology in conditioning the constituency building strategies implemented by different players microprocessor technology is specifically characterised as an architectural codified knowledge component with indirect network externalities and weak appropriability regime finally the paper also highlights the potential risks of both fragmentation and complete proprietary control of technology in technological processes involving strongly competitive situations

self reinforcing mechanisms and market information abstract we consider the possibility of switching between two technological standards when there are network externalities and imprecise market information by modeling the decisions of each firm by a stochastic process necessary and sufficient conditions for there to be multiple equilibria in market share and for permanent lock in to one of these equilibria not to occur are presented in such a case the market lingers at prevalence of one standard with intermittent transitions to prevalence of the other the frequency of which is derived by the theory of large deviations

policy innovation in local jurisdictions testing for neighborhood influence in school choice policies before making difficult decisions individuals tend to collect information on decision makers in reference groups with respect to policy innovations in a decentralized public sector this may give rise to positive neighborhood influence on adoption decisions in this paper u s school district data are used to show that decision makers indeed are heavily affected by decision makers in reference groups the policy innovation under consideration is inter district public school choice the results suggest that if a given district s neighbors expected benefits from adopting school choice policies increase this substantially increases the original district s probability of adoption the paper thus supports the view that the diffusion of policy innovations is stimulated by horizontal interaction among local governments

state and standards in this paper a new economic approach to standardization has been presented standardization has been regarded as a problem ofgradual choice an individual chooses to apply more or less standards within a hierarchy of standards with this decomposition of standards the problem of strategic market power becomes less important than in the traditional models of standardization it becomes possible to analyze the problems of network externalities within a framework of non strategic behavior and to apply the tools of the traditional theory of externalities and public goods while decentralized action may lead to too little standardization committees may overcome this deficiency to some extent but bureaucracies are likely to lead to overstandardization in the empirical section of the paper it has been shown that our approach can be applied to the standard setting process in languages railroads and telecommunications in all three cases the tendency of bureaucracies to generate more standardization than committees has been corroborated

self reinforcing mechanisms and interactive behaviour we consider the possibility of switching between two options when there are benefits from compatibility and imprecise information about the other agents choices we find that lock in to one of multiple equilibria is just a temporary occurrence the system lingers at prevalence of one option with intermittent transitions to prevalence of the other

optimal bundling of technological products with network externality for many high tech and internet related products utility to consumers depends in part on the size of the user base a phenomenon called network externality a firm with a portfolio of these and other products that are often asymmetric in their degree of network externality or marginal cost may have to look beyond the traditional strategies of pure components pure bundling and mixed bundling one such strategic alternative in a two product case would be a so called mixed bundling 1 under which the bundle and product 1 are offered but the other product can only be purchased in a bundled form the purpose of this study is to compare and contrast the impact of such asymmetry or symmetry in direct network externality and cost on the choice of bundling strategies we model a monopolist firm that has a product in each of two categories and faces heterogeneous consumers results suggest that pure bundling is more profitable when both products have low marginal costs or high network externality whereas pure components or mixed bundling 1 is more profitable when the products diverge in their costs and network externality e g only one product has network externality traditional mixed bundling is optimal in other instances

the international penetration of ibusiness firms network effects liabilities of outsidership and country clout the burgeoning of ibusiness firms in the modern digital economy challenges the received internationalization theory given that ibusinesses such as social networking sites create value by providing a digital platform for users to interact with one another we employ a user network perspective and externalization logic suggesting that ibusinesses internationalization process depends critically on users collective interactions instead of being solely driven by firms market commitments as noted by the uppsala model however ibusinesses may suffer from liabilities of outsidership due to the boundedness of international network effects drawing on social network theory we demonstrate that such liabilities can be mitigated by first diffusing the ibusiness platform in countries with higher clout our analysis using a unique dataset of mobile ibusiness platforms finds empirical support for the hypotheses we discuss theoretical implications for the network approach of the uppsala model in the digital era

households decisions to participate in china s sloping land conversion program and reallocate their labour times is there endogeneity bias abstract past impact evaluations of china s largest ecological restoration program have assumed the absence of self selection endogeneity in the likelihood and extent of participation using appropriate testing procedures and a panel dataset of 1000 households over 11 years in two primary provinces we found evidence of self selection in household behavior of generating off farm income but the hypothesis was rejected that there was a significant self selection component in households decision to participate in the program and generate farming income evaluations ignoring the self section for off farm labor were found to be biased and overly positive on program income impact self selection should thus be explicitly included unless there is counter evidence in any study of this kind

complementarity coordination and compatibility the role of fixed costs in the economics of systems abstract we analyze industry equilibrium and incentive to compatibility when goods produced by different producers generate utility only when consumed as component parts of a system we assume the presence of two systems each composed of some basic component and a set of differentiated complementary products the combination of complementarity between the two components of the system and of fixed costs in the production of the complementary product results in a form of network effect we focus on the role played by the size of the fixed costs in the production of the complementary products in determining the size of this system effect and by this means the structure and types of equilibria that may be observed monopolistic or duopolistic symmetric or asymmetric we also highlight the consequence of the same fixed costs for the private and social incentives to render the systems compatible

price competition and compatibility in the presence of positive demand externalities in many cases the benefit to a consumer of a product increases with the number of other users of the same product these demand interdependencies are referred to in the literature as positive demand externalities or network externalities this paper examines the dynamic pricing behaviors of an incumbent and a later entrant with special attention to the impacts of demand externalities compatibility and competition on prices and profits defining market power as the ability to price above a competitor without losing market share we show how demand externalities and installed base combine to confer market power we model optimal pricing as a differential game with the optimal price trajectory established as nash open loop controls for a duopoly durable goods market with strong demand externalities the results show an increasing price trajectory can be optimal as expected a new entrant is better off if its products are compatible with those of the incumbent especially when demand externalities are strong and the installed base of the incumbent is large less intuitively the incumbent as well may be better off agreeing on common standards the comparison of monopoly and duopoly shows that under strong demand externalities and a small installed base the incumbent profits from compatible entry

competition or predation consumer coordination strategic pricing and price floors in network markets although network effects can make predation more likely to succeed we find that the leading anti predation rules may lower or raise efficiency and consumer welfare in network markets we find that a the extensive debates about the correct measure of cost on which to base price floors are unlikely to be productive b the ordover willig rule that is widely thought to be correct in theory but difficult to apply in practice is in fact incorrect in theory and c efficient price floors would have to depend on consumer expectations and coordination processes that are unlikely to be observable in practice

a note on switching costs and technology choice it is a commonplace claim that the ibm pc owes its success not to technical superiority but to the belief that it would be successful this note presents a simple model where switching costs between brands say because of incompatible software can lead to an inferior technology being adopted switching costs arise when buyers find it costly to switch to a competitor once they have bought from one manufacturer even if ex ante their products were identical 1 if consumers care about which firms survive perhaps because they need to buy spare parts then their belief that particular firms will succeed may ensure that these firms do indeed succeed since possibly more efficient rivals may be unable o overcome consumers reluctance to buy one may therefore find inferior technologies being adopted this model can be seen as an example of the analysis of katz and shapiro 1986 in which expectations can also lead to poorer products winning out in their model this is because of network externalities that is to say consumers value a product more highly the more other consumers buy it here there are no direct network externalities but the presence of switching costs and increasing returns together generates an indirect externality since the more consumers who buy a product the more likely it is to survive and the more attractive it is to other consumers

innovation diversity and diffusion a self organisation model a number of features of innovation diffusion are identified appropriability diversity expectations selection learning and spillover externalities a dynamic model is formul ated to embed the diffusion question into a more general framework of disequilibrium competition the model incorporates distinct vintage structures reflecting a change in technological trajectory learning by using a nd expectations driven investment rules of thumb simulation studies reveal robust quasi logistic curves but a complicated pattern of net market share gains and losses uncertainty regarding the rationality of early or late adoption it is argued ensures that the requisite behavioral variety is present to generate these diffusion patterns copyright 1988 by royal economic society

ingratiation experimental evidence we investigate experimentally ingratiatory behavior expressed by opinion conformity both individuals performance at a task and their opinions on various topics can be observed before unequal payoffs are assigned by a second mover in some treatments first movers can change their opinion after learning that held by the second mover we find evidence of high ingratiation indices as opinion conformity is rewarded however second movers reward conformity less when it is common knowledge that opinions can be manipulated strategically introducing a monetary cost for changing opinion reduces ingratiation introducing performance related pay for the second mover makes ingratiation less rewarding but does not eliminate it completely reducing the noise in the measurement of ability has little effect

competing technologies the learning curve and rational expectations abstract the problem of choice between several variants of a technology subject to dynamic learning economies is examined in a rational expectations model with overlapping adopters it is shown that even with rational expectations the long term market outcome depends sensitively on the pattern of early chance events and that only one variant of the technology will come to dominate the market in the long run this variant need not be the one which is socially optimal or most promising technically

monopoly pricing with network externalities abstract how should a monopolist price a durable good or a new technology that is subject to network externalities in particular should the monopolist set a low introductory price to attract a critical mass of adopters in this paper we provide intuition as to when and why introductory pricing might occur in the presence of network externalities incomplete information about demand or asymmetric information about costs is necessary for introductory pricing to occur in equilibrium when consumers are small

bertrand supertraps we study oligopoly price competition between multiproduct firms firms whose products interact in the profit function specifically we focus on the impact of intrafirm product interactions on the level of equilibrium profits this impact may be decomposed in two different ways a a direct effect keeping the competitors actions fixed plus a strategic effect i e through the competitors actions or alternatively b a competitive advantage effect change in firmi only plus an imitation effect change in all other firms we derive conditions such that a the strategic effect more than outweighs the direct effect and conditions such that b the imitation effect more than outweighs the competitive advantage effect bertrand supertraps for example an increase in the degree of economies of scope would increase profits if prices were fixed or if the change were limited to firmi s cost function however if all firms increase the degree of economies of scope then all firms receive lower profits a variety of other applications is considered including learning curves core competencies demand synergies systems competition compatibility bundling network effects switching costs durable goods long term contracts

strategic complements and substitutes and potential games abstract we show that games of strategic complements or substitutes with aggregation are pseudo potential games the upshot is that they possess nash equilibria in pure strategies ne even if the strategy sets are not convex and that various dynamic processes converge to ne in particular ne exist in cournot oligopoly with indivisibilities in production our notion of aggregation is quite general and enables us to take a unified view of several disparate models

over confidence may reduce negotiation delay abstract when a seller negotiates with multiple buyers how does over confidence affect the timing of trade in this paper we distinguish between over confidence about trade opportunities and over confidence about the terms of trade in bargaining environments without externalities both types of over confidence can cause delays in agreement if externalities are present the two forms of subjective bias have very different impacts on delay in particular over confidence about trade opportunities may reduce bargaining delay

globalizing carbon lock in this paper extends the arguments surrounding carbon lock in elaborated in unruh energy policy 28 2000 817 30 2002 317 to countries currently undergoing industrialization it argues that for numerous reasons industrializing countries are unlikely to leapfrog carbon intensive energy development on the contrary carbon lock in may be globalizing and could further constrain climate change mitigation options it is then argued that many policy recommendations ignore carbon lock in possibly limiting their potential for successful implementation the paper then discusses four policy approaches that appear to have advantages given lock in conditions it is recognized however that relative ease of implementation does not necessarily equate with superiority instead it is merely a path dependent outcome of past development decisions pursuing policies on the basis of relative implementation ease may help address the issue of climate change but could also result in sub optimal outcomes along other dimensions of sustainable development

private contracting with externalities divide and conquer abstract this paper considers the efficacy of divide and conquer strategies in principal agent games involving contracting with externalities we find that whereas divide and conquer offers can arise in equilibrium under some conditions when the principal s offers are publicly observable they cannot arise in equilibrium when the principal s offers are privately observable and the agents hold passive out of equilibrium beliefs this insight applies to technology and platform adoption decisions with network effects labor relations settlement negotiations and input licensing among others

what factors influence the diffusion of the mobile communications industry a case study from china mobile communications have experienced rapid growth in china and play an increasingly important role in the country s economic development however there is still vast regional imbalance in china s communications industry which we will be exploring here including examining what factors influence diffusion paths and cause these differences through a two step estimate method this paper successfully describes the differences in the diffusion paths of mobile communications in different regions of china it evaluates the impacts of industry variables intra regional income gaps macroeconomic factors such as degree of urbanisation and geographic effects of neighbouring provinces our work may be helpful to inform policymaking for effective and equitable development

boom and bust patterns in the adoption of financial innovations we develop a dynamic model of the adoption of financial innovations each period firms decide whether or not to adopt an innovation of uncertain value and the profitability of each period s adoptions reveals information about the innovation s value we show that characteristics of financial innovation waves cited by critics as evidence of irrational excess are in fact consistent with fully rational behavior we also show that social welfare is enhanced when more firms adopt innovations of questionable value and that financial intermediaries base an incentive to encourage such adoption article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

contracts and externalities how things fall apart a single principal interacts with several agents offering them contracts the crucial assumption of this paper is that the outside option payoffs of the agents depend positively on how many uncontracted or free agents there are we study how such a principal unwelcome though he may be approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out two variants are considered when the principal cannot re approach agents there is a unique equilibrium in which contract provision is split up into two phases in phase 1 simultaneousoffers at good though varying terms are made to a number of agents in phase 2 offers must be made sequentially and their values are discontinuously lower they are close to the very lowest of all the outside options when the principal can repeatedly approach the same agent there is a multiplicity of equilibria in some of these the agents have the power to force delay they can hold off the principal s overtures temporarily but they must succumb in finite time in both models despite beingable to coordinate their actions agents cannot resist an invasion by the principal and hold to their best payoff it is in this sense that things eventually fall apart

the provision of two way converters in the transition process to a new incompatible technology this paper analyzes the dynamic provision of converters in the transition process between two incompatible technologies i derive the equilibrium behavior in the provision of converters and compare it to the socially optimal outcome i find that there can be two types of market inefficiency in the provision of converters first converters can be supplied by the wrong group second the timing of provision may be too late since the providers of converters ignore the positive externality that their provision would confer on the users of the rival technology

growth incentives to invest in a network externality environment firms that operate in the telecommunications industry often have to make large and risky investments in digital infrastructure this paper examines how firm size affects the incentive to invest in infrastructure projects in industry environments that incur substantial network externalities we suggest that in the presence of network externalities a firm s rate of growth first declines and then increases with the size of its user base an implication of this result is that firms may benefit from making investments in emerging digital infrastructure early enough to achieve a substantial user base and to gain that user base before other firms investments pre empt them the results mean that firms that undertake earlier successful investment may achieve preemption very quickly the sources of network externalities contribute to the incidence of strategic alliances in network industries particularly when coupled with the pressures of technical uncertainty copyright 1998 by oxford university press

technology adoption in the presence of network externalities we analyze technology adoption in industries where network externalities are significant the pattern of adoption depends on whether technologies are sponsored a sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it key findings include the following 1 compatibility tends to be undersupplied by the market but excessive standardization can occur 2 in the absence of sponsors the technology superior today has a strategic advantage and is likely to dominate the market 3 when one of two rival technologies is sponsored that technology has a strategic advantage and may be adopted even if it is inferior 4 when two competing technologies both are sponsored the technology that will be superior tomorrow has a strategic advantage

coordinating adoption decisions under externalities and incomplete information abstract a monopolist sells a good whose value depends on the number of buyers who adopt it as well as on their private types the seller coordinates the buyers adoption decisions based on their reported types and charges them the price based on the number of adoptions we study ex post implementable sales schemes that are collusion proof and show that under the revenue maximizing scheme more buyer types are willing to adopt when there are more adoptions and the number of adoptions is maximized subject to the participation constraints

the diffusion of clean technologies a review with suggestions for future diffusion analysis abstract this article gives an overview of the literature on clean technology diffusion followed by suggestions for future analysis findings from diffusion analysis are presented in the form of 10 stylised facts helping the reader to see the forest for the trees the overall conclusion is that the diffusion of clean technology same as the diffusion of normal innovations is governed by endogenous mechanism epidemic learning and learning economies and by exogenous mechanisms policy is important for clean technology diffusion but other factors are important too the characteristics of the clean technology absorptive capacities of potential adopters and the age structure of capital it is often overlooked that companies have a choice they can choose between an end of pipe solution a process change adaptation and a change of process substitution this means that the diffusion and evolution of one clean technology will be at the expense of the diffusion of another clean technology something overlooked in studies on clean technology diffusion further research is needed on the influence of public policy on clean technology choice expectations about learning economies and prices adjustment costs network externalities and complementary innovations on clean technology adoption choices

born digitals thoughts on their internationalization and a research agenda johanson and vahlne j int bus stud 40 9 1411 1431 2009 articulate various theoretical mechanisms underpinning the internationalization process mechanisms they suggest are pertinent across firm type their argument builds on their earlier publications and in this spirit we consider johanson and vahlne 2009 in the contemporary context of digital firms in particular we revisit their theorizing as it relates to firms that had only begun to emerge when johanson and vahlne published their award winning paper born digitals we address how technological affordances especially direct engagement with stakeholders automation network effects flexibility and scalability affect the internationalization of born digitals we also develop a future agenda for international business research on born digital firms

local network externalities and market segmentation this paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction it departs from the standard katz shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents it shows that even if rival firms engage in bertrand competition this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits the analysis also shows that some graphs or network structures do not permit such segmentation while for others there are easy to interpret conditions under which market segmentation obtains in equilibrium c 2009 elsevier b v all rights reserved

the economics of consumer knowledge while approaches to measuring the state of a consumer s knowledge are well developed much less is known about the relationship between knowledge and consumer choice and information search the purpose of this article is to explore these relationships by treating consumer knowledge as human capital which affects the full price of consumption and search activities using this framework models are presented to explain life cycle consumption patterns lifestyles brand loyalty choice of features and search behavior this economic perspective is compared and contrasted to other consumer research on these topics including recent qualitative research that examines consumption behavior

generational technological change effects of innovation and local rivalry on performance we tested the effects of innovation and market complexity on firm performance generational technological change a major advance within a technology regime fosters the emergence of niches and local

the welfare implications of unauthorized reproduction of intellectual property in the presence of demand network externalities this paper finds that unauthorized reproduction of intellectual property in the presence of demand network externalities can not only induce greater firm profits relative to the case where there is no copying it can lead to a pareto improvement in social welfare ceteris paribus when network externalities are present firms have a greater incentive to expand output because marginal revenue is higher and or they may wish to create preemptive installed bases this paper suggests that unauthorized copying can be a relatively efficient means of achieving this by allowing the firm in effect to price discriminate among different classes of consumers copyright 1994 by blackwell publishing ltd

something to talk about social spillovers in movie consumption we exploit the randomness of weather and the relationship between weather and moviegoing to quantify social spillovers in movie consumption instrumenting for early viewership with plausibly exogenous weather shocks captured in lasso chosen instruments we find that shocks to opening weekend viewership are doubled over the following five weekends our estimated momentum arises almost exclusively at the local level and we find no evidence that it varies with either ex post movie quality or the precision of ex ante information about movie quality suggesting that the observed momentum is driven in part by a preference for shared experience and not only by social learning

the city network paradigm measuring urban network externalities in recent years network behaviour has been analysed extensively as the emerging model for economic growth by network behaviour a metaphor for co operative behaviour among individuals corporate

inefficient standard adoption inertia and momentum revisited i introduction since the establishment of the theory of network effects economists have been concerned with the question of whether a market with network effects will tend to settle on the socially optimal standard it has been postulated that markets may exhibit excess inertia once a technological standard is in place a new superior standard may not displace it because of installed base effects alternatively markets may exhibit excess momentum consumers may adopt a new standard too quickly ignoring the stranding effect they are having on previous users similar issues arise in the adoption of language and social norms the literature has investigated various conditions under which one of these inefficiencies arises such inefficiencies are of particular concern for open technologies such as the qwerty and dvorak keyboards 1 the situation is somewhat different when individual firms own standards in that case a simple argument seems to indicate that there is no possibility that an inefficient standard will persist if a new standard is superior in any objective sense there are gains to be made from switching to it once the standard has been adopted the firm can appropriate these gains therefore the firm has incentive to lower the initial price enough to induce adoption of the standard the preceding argument is made in liebowitz and margolis 1999 and repeated in spulber 2002 spulber expresses a general skepticism about the likelihood of inefficiencies when property rights are defined and markets exist critics might claim that previous models that imply inefficient standard adoption are unrealistic in some way and that if such models were modified slightly the inefficiency would disappear i reconsider the issue of inefficient standard adoption using a parsimonious yet compelling model assuming only that there are successive generations of finitely lived consumers that preferences are heterogeneous and that there are network effects among users adoption decisions can be inefficient this is true even if consumers can coordinate efficiently within a generation and a firm can act as a coordinating device across generations the model presented here generates some of the same results found in other papers collectively but in a more general setting and with more robust results if there is an established standard and a superior alternative emerges no single generation of consumers will be willing to switch to the new standard if the switching cost the loss of network benefit from breaking with past users is too high it may be that the benefits to future generations of consumers are large enough that from a social standpoint it would be efficient for one generation to adopt the new standard even if it is privately optimal for that generation to retain the old standard on the other hand the current generation considers only its own switching cost and not the cost it imposes on the previous generation leading to potential overadoption of new technology even for proprietary standards it is not clear that the incentive of the firm to induce adoption matches the social incentive in particular if consumer preferences are heterogeneous the firm will not be able to price in such a way to extract all of the additional surplus gained from the new standard on the other hand the firm will be able to appropriate some of the surplus generated by the network effect itself which is present for any standard and thus does not affect the social incentive to change standards it is not possible to address this issue with a two period model as in some of the previous literature see for example choi 1994 choi and thum 1998 katz and shapiro 1986 if a new technology is introduced in the second period but then the game ends the welfare of future generations of consumers is neglected 2 this article also differs from previous infinite horizon models of technology adoption

fragmented standards and the development of japan s microcomputer software industry abstract the japanese software industry has yet to join the ranks of japan s other industries pre eminent in global competition this research offers a perspective on the delay of a significant japanese presence in global markets that relies on newly developed network externalities theory in economics after summarizing the influence of the hardware industry on the development of the downstream software industry the paper describes the deleterious impact of multiple standards on the emerging microcomputer software industry the paper outlines public policy efforts to address problems that arise from multiple standards and notes that public policy has proven less successful in this industry a comparison of the competitiveness of the us and japanese microcomputer software industries follows the discussion on competitiveness suggests that while japanese firms may lag in the near term the problems posed by multiple standards may well aid in the long term adaptability and performance of the japanese industry in contrast the us industry while benefiting from the existence of a single dominant standard has evidenced difficulty moving to new standards

induced adoption and externalities in the regional diffusion of information technology antonelli c 1990 induced adoption and externalities in the regional diffusion of information technology reg studies 24 31 40 information technology can be considered as a set of complex radical innovations which continues to evolve and has a major impact both within the plant and the office in such a context its regional diffusion is likely to be determined by relevant externalities together with the effects of a wage induced process of localized technological change and adoption data on the territorial distribution of fax machines and modems show that the levels of diffusion of information technology in italy is highly uneven favouring central regions endowed with higher levels of fixed and human capital and consequently income the econometric analysis confirms that diffusion levels of both fax and modems across provinces are significantly associated with the level of wages as is to be expected from the induced adoption hypothesis and from the existence of external factors such as the presence

network effects and environmental externalities do clean technologies suffer from excess inertia abstract we study the diffusion of a clean substitute to a dirty durable in a dynamic model consumer utility of both durables increases in their respective market shares due to network effects first we characterize the optimal dirty good tax the tax should achieve a long run optimal division of the market between the two goods along the transition path to this steady state the optimal tax depends on the current and future market shares of the clean durable thus even if the marginal environmental damage from an additional dirty durable is constant the optimal tax should not be constant second we study whether excess inertia can occur if the emission tax is not optimally set we then find that a constant tax that only accounts for the environmental damage caused by the dirty good may lead to excess inertia excess inertia could happen even if the clean technology is proprietary and the technology owner has incentives to sponsor the initial market diffusion of the technology

technology choice and timing with positive network effects abstract when two competing and incompatible products coexist in a market potential users face a choice between the two products and the alternative of deferring the decision this paper examines the choice between the two substitutes where each one is subject to a positive network effect that is a user of one of the products experiences an increase in the value for each additional person using the same product we examine this buy or wait problem either for an individual or a manager making the investment on behalf of a firm by formulating and analyzing a decision theoretic model to model the stochastic evolution of market share we build on the generalized polya urn of arthur et al arthur w b ermoliev y m kaniovski y m 1987 path dependent processes and the emergence of macro structure european journal of operational research 30 3 294 303 allowing for composition of the market to affect not just the relative market shares but also the absolute growth rate of the market we show that the optimal strategy is defined by a pair of market penetration thresholds that depend on the market composition looking at the effect of the network effects on the optimal strategy we find that more pronounced network effects can either raise or lower the penetration thresholds

impact of bayesian learning and externalities on strategic investment we investigate the interplay between learning effects and externalities in the problem of competitive investments with uncertain returns we examine a game theoretic duopoly investment model in which i a firm can learn about the profitability of the investment by observing the performance of the first mover and ii externalities exist between the investments of two firms we find a region of a war of attrition between the two firms in which the interplay between externalities and learning gives rise to counterintuitive effects on investment strategies and payoffs in particular we find that contrary to the conventional war of attrition where an increase in benefits for the follower generally delays the first move an increase in the rate of learning which tends to benefit the follower can hasten the first investment this paper was accepted by james smith decision analysis

a positive theory of flexibility in accounting standards abstract we develop a positive theory of accounting standards when standards generate network externalities and differ in the amount of reporting discretion or flexibility they provide firms we evaluate expected value maximizing firms preferences between two standards regimes rigid and flexible as the number of firms subject to each standard varies as the organization of the securities market varies and as the mapping from the underlying economics of the firms transactions to the accounting reports produced under the two standards vary we also compare firms preferences between the two regimes to the preferences of profit maximizing traders in the firms securities

the economics of convention c onventions regulate much of economic and social life yet they have received surprisingly little attention from economists by a convention we mean a pattern of behavior that is customary expected and self enforcing everyone conforms everyone expects others to conform and everyone has good reason to conform because conforming is in each person s best interest when everyone else plans to conform lewis 1969 familiar examples include following rules of the road adhering to conventional codes of dress and using words with their conventional meanings conventions with direct economic implications include species of money and credit industrial and technological standards accounting rules and forms of economic contracts indeed it would scarcely be an exaggeration to say that almost all economic and social institutions are governed to some extent by convention the main feature of a convention is that out of a host of conceivable choices only one is actually used this fact also explains why conventions are needed they resolve problems of indeterminacy in interactions that have multiple equilibria indeed from a formal point of view we may define a convention as an equilibrium that everyone expects in interactions that have more than one equilibrium the economic significance of conventions is that they reduce transaction costs imagine the inconvenience if whenever two vehicles approached one another the important exceptions are sugden 1986 and ullman margalit 1977 the interested reader might also refer to the symposium on social norms that appeared in the fall 1989 issue of this journal with articles by sugden 1989 and elster 1989

hardware quality vs network size in the home video game industry abstract this paper analyzes competition between multiple proprietary and incompatible hardware systems when indirect network effects are present and software is provided competitively by third party developers a discrete choice demand structure is employed within a game theoretic setting to allow for a continuum of market share possibilities empirical evidence supports the claim that excess inertia is not a pervasive problem two data sets covering the life of the home video game industry yearly from 1976 to 2003 and monthly january 1995 to october 2007 yield three main results 1 market share is 11 4 times more sensitive to hardware quality than network size 2 the number of available games is 3 69 times more sensitive to hardware quality than network size and 3 hardware quality has a larger impact than network size on the probability of hardware success

preying for monopoly the case of southern bell telephone company 1894 1912 focusing on the southern bell telephone company we propose a modified version of the predation hypothesis to explain bell s natural monopoly over local telephone service southern bell effectively eliminated competition through a strategy of pricing below cost in response to entry which deprived competitors of the cash flow required for expansion even if it failed to induce exit investing in toll lines ahead of demand isolating independent companies in smaller towns and rural areas and forcing them to consolidate on favorable terms and influencing local regulatory policy in large cities to weaken rivals and ultimately to institutionalize the bell monopoly

obtaining strategic advantage from being imitated when can encouraging clones pay an important business strategy research theme concerns finding ways to minimize competition faced by the firm this paper however focuses on a different set of situations the model developed suggests that an innovator s best strategy may be to encourage clones of its product when a network externality is present key factors to consider in assessing whether encouraging cloning is the innovator s best strategy are 1 the benefit to be derived in terms of added user base contributed by the clone sales traded off against 2 the unit sales that will be lost to the clones these factors in turn depend upon the strength of the network effect and the degree to which the innovator s product quality is perceived by consumers to be superior to the clone s the model further suggests that both the innovator and clone earn their highest payoffs when the clone takes the lead in price setting i e when the clone establishes its own price by considering for each price it might set how the innovator will react to that price and the innovator as price follower responds to the price the clone chooses the paper demonstrates that the clone leader innovator follower situation represents the unique nash equilibrium in price setting strategies a central implication is that when operating in a network externality environment instead of a problem to be avoided clones may be valuable assets to an innovating firm building up the user base for the innovator s technology by bringing lower valuing consumers into the market which in turn makes the innovator s product more attractive to high and medium valuing purchasers thus when the above described conditions hold being cloned can be more profitable for an innovating firm than dominating the market alone

optimal patenting and licensing of financial innovations recent court decisions starting with the state street decision in 1998 allow business methods to be patentable and now give financial institutions the option to seek patent protection for financial innovations this new patentability paradigm and the heterogeneity of characteristics associated with financial innovations pose an immediate decision problem for senior management what to patent we present a parsimonious decision framework that answers this question we show that for innovations with certain characteristics it is optimal not to patent even if the option of patenting and licensing is available our model emphasizes the role of embedded real options that arise from certain types of financial innovations the model provides an explanation of observed patenting behavior of financial institutions and the success of a wide class of innovations including swaps credit derivatives and pricing algorithms

network effects on strategic interactions a laboratory approach abstract we examine the effect of interaction structure network on two classes of collective activities herding and shirking respectively referring to the situation where a player s incentive to take a certain action increases and decreases if more of her network neighbors follow the same action in our experiment we find that subjects do not act according to theoretical equilibrium and their frequencies of making the socially beneficial choice in herding and shirking games are inversely influenced by the number of network neighbors they have moreover the observed local network effect is stronger in shirking games while the global network effect is more significantly present in herding games we explain the behavioral regularities through a hybrid learning model which extends sewa learning into a network context as such our learning model provides a foundation for the observed dynamics disequilibrium behavior as well as the local and global network effects