Indirect Network Effects and Adoption Externalities

Jeffrey Church (), Neil Gandal and David Krause ()
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Neil Gandal: Department of Public Policy, Tel Aviv University and CEPR n

Review of Network Economics, 2008, vol. 7, issue 3, pages 337-358

Abstract: Can indirect network effects lead to adoption externalities? If so, when? 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; software; platforms (search for similar items in EconPapers)
Date: 2008
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Related works:
Working Paper: Indirect Network Effects and Adoption Externalities (2003)
Working Paper: Indirect Network Effects and Adoption Externalities (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:rne:rneart:v:7:y:2008:i:3:p:337-358

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