Indirect Network Effects and Adoption Externalities

Jeffrey Church (), Neil Gandal and David Krause

Microeconomics from University Library of Munich, Germany

Abstract: The conventional wisdom is that indirect network effects, unlike direct network effects, do not give rise to externalities. In this paper we show that under very general conditions, indirect network effects lead to adoption externalities. In particular we show that in markets where consumption benefits arise from hardware/software systems, adoption externalities will occur when there are (i) increasing returns to scale in the production of software, (ii) free-entry in software, and (iii) consumers have a preference for software variety. The private benefit of the marginal hardware purchaser is less than the social benefit since the marginal hardware purchaser does not internalize the welfare improving response of the software industry, particularly the increase in software variety, on inframarginal purchasers when the market for hardware expands.

Keywords: Network Externalities; Network Effects (search for similar items in EconPapers)
JEL-codes: D62 L13 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2003-01-13
New Economics Papers: this item is included in nep-cdm, nep-ind, nep-mic, nep-net and nep-pub
Note: Type of Document - PDF; pages: 26
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14) Track citations by RSS feed

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/mic/papers/0301/0301001.pdf (application/pdf)

Related works:
Journal Article: Indirect Network Effects and Adoption Externalities (2008)
Working Paper: Indirect Network Effects and Adoption Externalities (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpmi:0301001

Access Statistics for this paper

More papers in Microeconomics from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ().