Essays on network externalities: Theoretical and empirical analyses

Pornpilai Ongardanunkul, Boston College

Abstract

Network externalities were originally introduced in the communications network literature. Initially, these externalities were referred to as consumption externalities, in which demand is modeled as being interindependent. In other words, the utility a consumer derives from joining a communications service increases as others join the network. Most studies done in these literatures are in a monopoly context, and they draw similar conclusions on the multiplicity of equilibria of such markets. Typically, there are multiple equilibria at any given price. Which equilibrium is attained depends on the initial disequilibrium condition, the adjustment process, and the static model chosen. The theory of independent demand was used mostly in this context until the mid 1980s, when it was brought to a wider audience in an oligopoly setting. Consumption externalities are referred to as network externalities or network effects during this period. The theory has been mostly applied to the computer industry, where there are a few players in the market and the products are categorized as network goods. Papers at the frontier of this field frequently address issues of compatibility, standardization, network adoption, and network competition in such markets. Network externalities have been tested empirically in various articles. Mainly, there are two types of externalities being investigated. The first type is the direct network externality, which is common in communications services, e.g. telephone, railroad, telegraph, ATM, etc. This type of externality is tested through the importance of the installed base of consumers in the network of study. Empirical work is done by calibrating the effect of the installed base on a consumer's willingness to pay The second type is the indirect network externality, which is prevalent in the computer industry due to compatibility issues and the significance of complementary goods. This type of externality is tested through the abundance of complementary goods. The most frequently used model so far is a hedonic price model. In this study, a variety of different manifestations of network externalities are examined in both the theoretical and empirical aspects, the monopoly and duopoly contexts, and the demand and the production sides, hopefully providing a solid yet diverse contribution to this literature.

Recommended Citation

Pornpilai Ongardanunkul, "Essays on network externalities: Theoretical and empirical analyses" (January 1, 2003). Boston College Dissertations and Theses. Paper AAI3122134.
http://escholarship.bc.edu/dissertations/AAI3122134