Managing network effects in high-tech markets

Academy of Management Executive

Volumn 17, Issue 4, 2003, Pages 40-52

  Bonardi, Jean Philippe ^a   Durand, Rodolphe ^b  

^a UNIVERSITY OF WESTERN ONTARIO   (Canada)

^b EMLYON BUSINESS SCHOOL   (France)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 4043085065     PISSN: 10795545     EISSN: None     Source Type: Journal    
DOI: 10.5465/AME.2003.11851827     Document Type: Article

References (38)

1. See for instance Besen, S. M., & Saloner, G. 1989. The economics of telecommunication Standards. In R. W. Crandall & K. Flamm (Eds.), Changing the rules: Technological change, international competition and regulation in communication: 177-220. Washington DC: Brookings Institution; David, P. A., & Steinmuller, W. E. 1994. Economics of compatibility and competition in telecommunication networks. Information Economics and Policy, 6(3/4): 217-242.
2. See for instance Besen, S. M., & Saloner, G. 1989. The economics of telecommunication Standards. In R. W. Crandall & K. Flamm (Eds.), Changing the rules: Technological change, international competition and regulation in communication: 177-220. Washington DC: Brookings Institution; David, P. A., & Steinmuller, W. E. 1994. Economics of compatibility and competition in telecommunication networks. Information Economics and Policy, 6(3/4): 217-242.
3. These network effects can be direct or indirect. Direct effects occur when the value of a product for a consumer directly rises with the number of consumers purchasing the product. Telecommunications is a classic example of direct-network effect, since joining a telephone network becomes more valuable to a given consumer as other consumers join this network. Fax machines operate similarly. See Katz, M-L., & Shapiro, C. 1985. Network externalities, competition, and compatibility. American Economic Review, 75(3): 424-440; and Katz, M-L., & Shapiro, C. 1986. Technology adoption in the presence of network externalities. Journal of Political Economy, 94(4): 822-841.
4. These network effects can be direct or indirect. Direct effects occur when the value of a product for a consumer directly rises with the number of consumers purchasing the product. Telecommunications is a classic example of direct-network effect, since joining a telephone network becomes more valuable to a given consumer as other consumers join this network. Fax machines operate similarly. See Katz, M-L., & Shapiro, C. 1985. Network externalities, competition, and compatibility. American Economic Review, 75(3): 424-440; and Katz, M-L., & Shapiro, C. 1986. Technology adoption in the presence of network externalities. Journal of Political Economy, 94(4): 822-841.
5. Economides, N., & Himmelberg, C. 1995. Critical mass and network size with application to the US fax market. Working Paper 95-11, New York University, Leonard N. Stern School of Business.
6. See Chou, C., & Shy, O. 1990. Network effects without network externalities, International Journal of Industrial Organization, 8: 259-270; or Church, J., & Gandal, N. 1992. Network effects, software provision, and standardization. Journal of Industrial Economics, 40: 85-104.
7. See Chou, C., & Shy, O. 1990. Network effects without network externalities, International Journal of Industrial Organization, 8: 259-270; or Church, J., & Gandal, N. 1992. Network effects, software provision, and standardization. Journal of Industrial Economics, 40: 85-104.
8. See Shapiro, C., & Varian, H. 1999. The art of standard wars. California Management Review, 41(2): 8-32. See also Antonelli, C. 1992. The economic theory of information networks. In C. Antonelli (Ed.), The economics of information networks: 5-27. New York: Elsevier; David, P. A. 1992. Information network economics: Externalities, innovations and evolution. In C. Antonelli (Ed.), op. cit., 103-106; and Farrell, J., & Saloner, G. 1986. Installed base and compatibility: Innovation, product pre-announcement, and predation. American Economic Review, 76(4): 940-955.
9. See Shapiro, C., & Varian, H. 1999. The art of standard wars. California Management Review, 41(2): 8-32. See also Antonelli, C. 1992. The economic theory of information networks. In C. Antonelli (Ed.), The economics of information networks: 5-27. New York: Elsevier; David, P. A. 1992. Information network economics: Externalities, innovations and evolution. In C. Antonelli (Ed.), op. cit., 103-106; and Farrell, J., & Saloner, G. 1986. Installed base and compatibility: Innovation, product pre-announcement, and predation. American Economic Review, 76(4): 940-955.
10. See Shapiro, C., & Varian, H. 1999. The art of standard wars. California Management Review, 41(2): 8-32. See also Antonelli, C. 1992. The economic theory of information networks. In C. Antonelli (Ed.), The economics of information networks: 5-27. New York: Elsevier; David, P. A. 1992. Information network economics: Externalities, innovations and evolution. In C. Antonelli (Ed.), op. cit., 103-106; and Farrell, J., & Saloner, G. 1986. Installed base and compatibility: Innovation, product pre-announcement, and predation. American Economic Review, 76(4): 940-955.
11. See Shapiro, C., & Varian, H. 1999. The art of standard wars. California Management Review, 41(2): 8-32. See also Antonelli, C. 1992. The economic theory of information networks. In C. Antonelli (Ed.), The economics of information networks: 5-27. New York: Elsevier; David, P. A. 1992. Information network economics: Externalities, innovations and evolution. In C. Antonelli (Ed.), op. cit., 103-106; and Farrell, J., & Saloner, G. 1986. Installed base and compatibility: Innovation, product pre-announcement, and predation. American Economic Review, 76(4): 940-955.
12. Tegarden, L., Hartfield, D., & Echols, A. 1999. Doomed from the start: What is the value of selecting a future dominant design? Strategic Management Journal, 20: 495-518.
13. Cusumano, M. A., Mylonadis, Y., & Rosenbloom, R. S. 1992. Strategic manoeuvring and mass-market dynamics: The triumph of VHS over Beta. Business History Review, 66(Spring): 51-94.
14. McGahan, A. 1993. Philips compact disc introduction. Harvard Business School Case (No. 792-035).
15. Cawson, A. 1994. Innovation and consumer electronics. In M. Dodgson & R. Rothwell (Eds.), The handbook of industrial innovation. Cheltenham: Edward Elgar.
16. Christensen, C. 1997. Disruptive technologies. Boston: Harvard Business Press.
17. Teece, D., Pisano, G., & Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic Management Journal. 18(7): 509-533.
18. Besen, S. M., & Farrell, J. 1994. Choosing how to compete: Strategies and tactics in standardization. Journal of Economic Perspectives, 8(2): 117-131.
19. Chesbrough, H., & Teece, D. 1996. When is virtual virtuous? Organizing for innovation. Harvard Business Review. January-February: 65-73.
20. See for instance related work such as Shane, S. 2002. Network ties, reputation and the financing of new ventures. Management Science, 48(3): 364-381.
21. On that dimension, see for instance Liebowitz, S. J., & Margolis, S. E. 1990. The fable of the keys. Journal of Law and Economics, 33(1): 1-26; and Liebowitz, S. J., & Margolis, S. E. 1994. Network externality: An uncommon tragedy. Journal of Economic Perspectives, 8(Spring): 133-150.
22. On that dimension, see for instance Liebowitz, S. J., & Margolis, S. E. 1990. The fable of the keys. Journal of Law and Economics, 33(1): 1-26; and Liebowitz, S. J., & Margolis, S. E. 1994. Network externality: An uncommon tragedy. Journal of Economic Perspectives, 8(Spring): 133-150.
23. On the VCR case, see for instance Klopfenstein, 1989. The diffusion of the VCR in the United States. In Levy, M. R. (Ed.), The VCR age: 21-39. Newbury Park, CA: Sage Publications. See also Lardner, J. 1987. Fast forward: Hollywood, the Japanese, and the onslaught of the VCR. New York: W. W. Norton.
24. On the VCR case, see for instance Klopfenstein, 1989. The diffusion of the VCR in the United States. In Levy, M. R. (Ed.), The VCR age: 21-39. Newbury Park, CA: Sage Publications. See also Lardner, J. 1987. Fast forward: Hollywood, the Japanese, and the onslaught of the VCR. New York: W. W. Norton.
25. The portable devices represented almost half the video game market in terms of units sold in 2000.
26. For an empirical analysis of network effects in the digital TV market, see for instance Gupta, S., Jain, D., & Sawhney, M. 1999. Modeling the evolution of markets with indirect network externalities: An application to digital television. Marketing Science, 18(3): 396-416.
27. For a review, see for instance Quélin, B., et al. 2001. Standardization of network technologies and interfirm technologies. Journal of Economic Survey, 15(4): 565-591.
28. Cusumano, M. A., Mylonadis, Y., & Rosenbloom, R. S. 1992. Strategic manoeuvring and mass-market dynamics: The triumph of VHS over Beta. Business History fleview, 66(Spring): 51-94; and David, P. 1985. Clio and the economics of QWERTY. American Economic Review, 75(2): 332-337.
29. Cusumano, M. A., Mylonadis, Y., & Rosenbloom, R. S. 1992. Strategic manoeuvring and mass-market dynamics: The triumph of VHS over Beta. Business History fleview, 66(Spring): 51-94; and David, P. 1985. Clio and the economics of QWERTY. American Economic Review, 75(2): 332-337.
30. Katz, M-L., & Shapiro, C. 1992. Product introduction with network externalities. Journal of Industrial Economics, 40(1): 55-83.
31. Garud, R., & Kumaraswamy, A. 1993. Changing competitive dynamics in network industries: An exploration of Sun Micro-systems' open systems strategy. Strategic Management Journal, 14(5): 351-369.
32. Shapiro, C., & Varian, H. 1999. The art of standard wars. California Management Review, 41(2): 8-32.
33. On this importance of local knowledge and information for network effects, see for instance Shane, S. 2000. Prior knowledge and the discovery of entrepreneurial opportunities. Organization Science 11(4): 448-469.
34. Consumers hesitate to adopt one of the core products until it is clear that there will be a sufficient amount and variety of complementary assets. Similarly, complementary-asset developers hesitate to commit until a sufficient number of consumers have adopted the core product. This creates interdependence between the timing decisions of consumers and complementary-asset developers. See Church, I., & Gandal, N. 1992. Network effects, software provision, and standardization. Journal of Industrial Economics, 40: 85-104.
35. See Gandal, N. 1994. Hedonic price indexes for spreadsheets and an empirical test for network externalities. Rand Journal of Economics, 25: 160-170.
36. Tirole, J. 1989. The theory of industrial organization. Cambridge, MA: MIT Press.
37. Lane, P., & Lubatkin, M. 1998. Relative absorptive capacity and interorganizational learning. Strategic Management Journal, 19: 461-477.
38. More current data on the videogames market were unavailable for the authors at the time they wrote this article. It seems however that the launch of the Microsoft X-Box and of the Nintendo Game Cube had an important impact on the market. In June 2002, Sony was reported to have 75 per cent of the U.S. market with its Playstation II, whereas Microsoft and Nintendo each had 12 per cent.