Preview

Network Externalities

Powerful Essays
Open Document
Open Document
1759 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Network Externalities
1. Introduction
With the rapid development of new communications technology and network technology, some industries such as information industry show significant network externality characteristics. Network externality has been defined as "a change in the benefit, or surplus, that an agent derives from a good when the number of other agent consuming the same kind of good changes" (Liebowitz & Margolis, 1996). In other words, the product will be more valuable if more people use it. For example, the telephone becomes increasingly valuable since people have greater use of it. Therefore, the network externality has essentially a positive feedback effect. This paper aims to explain the concept of network externalities and apply this theory into real-life examples.

In the first part, it provides a literature review for network externalities. The second part analyses of direct network effect, and the third part gives indirect network effect. An example is given in the fourth part and finally the paper draws a main conclusion.
2. Network Externalities – Literature Review
Katz and Shapiro (1994) explain the theory of network externalities and how consumers behave when they face choices. The literature examines how expectations, coordination, and compatibility affect three basic clusters of decisions: technology adoption decisions, product selection decisions and compatibility decisions. Expectations mean that rational buyers form the components that they will be buying in the future in terms of availability, price and quality (Katz & Shapiro, 1994). Coordination is defined as ‘system markets pose challenges for coordination among firms and consumers’ (Katz & Shapiro, 1994). Compatibility is defined as ‘a component designed to work in one system also work in another system’ (Katz & Shapiro, 1994). The article indicates that communication network has direct network effects, while the hardware/software paradigm involves indirect network effects. By using



References: Katz, M.L. & Shapiro, C. (1994). Systems competition and network effects. Journal of Economic Perspectives 8, 93–115. Liebowitz, S.J. & Margolis, S.E. (1996). Network Externalities (Effects). Retrieved On 11 October 2010, from: http://www.utdallas.edu/~liebowit/palgrave/network.html

You May Also Find These Documents Helpful

  • Powerful Essays

    Unit 12

    • 6979 Words
    • 28 Pages

    Bibliography: Goymer, John. "Unit 33: The Impact Of Communications Technology On Business." BTEC Level 3 Business. London: Edexcel, 2010. 424-33. Print.…

    • 6979 Words
    • 28 Pages
    Powerful Essays
  • Good Essays

    2. Why have each of the companies described in this case been successful in implementing internal social networks?…

    • 796 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Technology has advanced and changed very rapidly. Our business world depends on the most recent technology. Technology impacts customers’ choices of buying because what costumers want is convenience and personal satisfied tastes. Mckenna explains that, “…programmability is the new corporate capability to produce more and more varieties and choices for customers...offer each individual customer the chance to design and implement the ‘program’ that will yield the precise product, service, or variety that is right for him or her…explod[ing] into the reality of almost unlimited choice” (Mckenna 2).…

    • 1510 Words
    • 5 Pages
    Good Essays
  • Good Essays

    and other brokers that stand between them and their users.The same reduction of barriers that increase the bargaining power of customers also increases the threat of new competition by eliminating or reducing the need for a sales force and many physical assets that might have inhibited the entry of new business that could pose a threat. With a reduction in the differences between existing companies, the number of competitors increases, the geographic market widens making it more difficult to sustain operational advantages and puts pressure to compete on price with rivaling competition. Internet technology is based on universal standards that any company can use, making it easy for rivals to compete on price alone and for new competitors to enter the market. Some companies are better than others at using the internet, which…

    • 651 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    or passing on profits to customers in the form of lower prices. These five forces model show how it could endanger a company position in an industry. The Internet has changed the Porter’s competitive forces model, and this research paper will show now the impact of Information technology on the model of competition.…

    • 2514 Words
    • 11 Pages
    Powerful Essays
  • Better Essays

    The third is the complementarity, for many electronic products, widespread acceptance depends on the availability of related goods that enable or enhance their functionality. For instance, computers need software, and the DVD players need pre-recorded movies. The innovating firms must decide whether to produce such complement internally or to rely on others to do so (teece, 1986).…

    • 1351 Words
    • 6 Pages
    Better Essays
  • Better Essays

    Airports Externalities

    • 1047 Words
    • 4 Pages

    This academic paper explains the meaning of externalities in economics science and how they generate the benefit to the society as positive externalities or create some costs which are not taken in account while developing the project as negative externalities. The paper also describes the airports as one of the basic infrastructure affected by externalities. In the end, the relation between externalities and willing to pay is clarified.‎…

    • 1047 Words
    • 4 Pages
    Better Essays
  • Good Essays

    Technological developments are a factor that drives for organizational change. The Internet is constantly changing allowing more opportunities and connections throughout the world, allowing consumers and other organizations to communicate and conduct business through the Internet regardless of what country the company is located. As a result a company may be forced to adapt and change the company’s current plan to stay competitive within the market and make the most of the advancements that other companies are using to stay competitive. As well as keeping up with the consumer needs and preferences, as some consumers may use the technological advancements to his or her advantage to purchase products and services. However, if the company does not become accustomed to the technological changes and develop a plan to drive organizational change to utilize the technological advancements to their benefit the company could result in loosing consumers. These consumers could go to…

    • 1141 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Module 2 External Analysis

    • 4313 Words
    • 18 Pages

    Voice segment used to be the most profitable segment, however, it has been experiencing significant drop in revenue recently. Improvement in mobile phone…

    • 4313 Words
    • 18 Pages
    Good Essays
  • Best Essays

    The Team That Wasn't

    • 3588 Words
    • 15 Pages

    Zolkiewski, J. (2010). The Arrival of Technological Changes at the Business Net: A Learning Process. The Journal of Business & Industrial Marketing, 25(6), 443-443-453. Retrieved August 21, 2011, from ABI/INFORM Complete (ProQuest).…

    • 3588 Words
    • 15 Pages
    Best Essays
  • Powerful Essays

    Norback, P., Persson, L. & Tag, J. (2011). “Acquisitions, Entry and Innovation in Network Industries”. Research Institute of Industrial Economic. IFN Working Paper No. 867.…

    • 2474 Words
    • 10 Pages
    Powerful Essays
  • Good Essays

    One such way that an expanded IT investment has helped the company, is allow it to become better connected, and allow for faster transfer of information. This is especially important in today’s world, where everything and everyone is connected via the internet, and information is always accessible with the click of a button. Having a devoted information technology department has allowed the company to build and maintain its website, as well as more effectively advertise its presence online. With its online presence, the company can reach millions more consumers who otherwise would not have access to a physical store. The development of an internal domestic IT team has also allowed the company to secure their web based operations, and instantly attend to any issue that arises, rather than wait on outsourced work to complete at their own leisure.…

    • 593 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Crossing the Chasm

    • 1916 Words
    • 11 Pages

    that when a marketplace is confronted with the opportunity to switch to a new infrastructure paradigm-from typewriters, say, to word processorscustomers self-segregate along an axis of risk…

    • 1916 Words
    • 11 Pages
    Good Essays
  • Powerful Essays

    Weill, P. and Broadbent, M. Leveraging the New Infrastructure : How Market Leaders Capitalize on Information Technology, Harvard Business School Press, Boston, Massachusetts, USA, 1998.…

    • 6748 Words
    • 26 Pages
    Powerful Essays
  • Good Essays

    Bandwagon and Snob Effect

    • 550 Words
    • 3 Pages

    A positive network externality exists if the quantity of a good demanded by a consumer increases in response to an increase in purchases by other consumers.…

    • 550 Words
    • 3 Pages
    Good Essays