Indirect Network Effects and Adoption Externalities

Jeffrey Church (), Neil Gandal and David Krause ()

No 3738, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 effects; network externalities (search for similar items in EconPapers)
JEL-codes: L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-net
Date: 2003-02
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Related works:
Working Paper: Indirect Network Effects and Adoption Externalities (2003)
Journal Article: Indirect Network Effects and Adoption Externalities (2008)
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