EconPapers    
Economics at your fingertips  
 

The chilling effects of network externalities

Jacob Goldenberg, Barak Libai and Eitan Muller

International Journal of Research in Marketing, 2010, vol. 27, issue 1, 4-15

Abstract: Conventional wisdom suggests that network effects should drive faster market growth due to the bandwagon effect. However, as we show, network externalities may also create an initial slowdown effect on growth because potential customers wait for early adopters, who provide them with more utility, before they adopt. In this study, we explore the financial implications of network externalities by taking the entire network process into account. Using an agent-based as well as an aggregate-level model, and separating network effects from word of mouth, we find that network externalities have a substantial chilling effect on the net present value associated with new products. This effect may occur not only in a competitive framework, such as a competing standards scenario, but also in the absence of competition. Drawing on the collective action literature in order to relate network effects to individual consumer threshold levels, we find that the chilling effect is stronger with a small variability in the threshold distribution, and is especially affected by the process early on in the product life cycle. We also find a “hockey stick” growth pattern by empirically examining the growth of fax machines, CB radios, CD players, DVD players, and cellular services.

Keywords: Agent-based models; Contagion; Net present value; Network externalities; New product growth; Threshold levels (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (24) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167811609000871
Full text for ScienceDirect subscribers only

Related works:
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:eee:ijrema:v:27:y:2010:i:1:p:4-15

Access Statistics for this article

International Journal of Research in Marketing is currently edited by Roland Rust

More articles in International Journal of Research in Marketing from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2018-06-15
Handle: RePEc:eee:ijrema:v:27:y:2010:i:1:p:4-15